Improved data and greater transparency on order handling from brokers would help the buy-side mitigate MiFID II’s dark trading limits, according to theTRADEnews.com’s May poll.
Just over half of poll respondents (51.43%) backed transparency on order handling and better data, above more innovation in dark pools (35.71%) and greater use of sales traders (12.86%).
MiFID II, currently subject to consultation by the European Securities and Markets Authority, will impose caps on the amount of dark trading that can be conducted in Europe and will ban broker crossing networks for equity trading completely. Once MiFID comes into force, dark trading will be capped at 4% of all trading in a given name for a particular venue and 8% across the market as a whole. However, the rule only applies to trades conducted on dark multilateral trading facilities that use the reference price waiver or negotiated trade waiver.
The poll results suggest the buy-side is looking for clarity, and for access to detailed information on what is trading where.
Mark Goodman, head of quantitative electronic services Europe at Societe Generale, said it might seem like an oxymoron to talk about transparency in dark pools, but it did not surprise him that buy-side was keen for it.
Goodman said, “If you talk to the sell-side, they would agree with that as well. So, you have an industry where the providers and the consumers want this to happen, and it is just not happening. It is the strangest issue I have seen. This is partly due to the legislative process.”
One ongoing problem facing European market participants is the absence of a single source of data to measure trading levels across venues. MiFID II contains proposals for a consolidated tape, but these will not kick in until after the new directive is implemented, to allow time for a market-led solution to evolve.
“In the US there is a utility that provides post-trade feed of what has traded where, and at what price,” said Goodman. “What that means is that the buy-side has a very clear view of being able to compare their trade to what trades in the market and understand if they got a good fill or not.”
The buy-side has been calling for more transparency on how orders are routed and the nature of the participants, matching logic and order types well before the MiFID II's planned dark trading limits.
Adrian Fitzpatrick, head of investment and dealing at Kames Capital, "Many of the dark pools available today have high-frequency traders in them, especially the broker dark pool venues. For us, knowing our counterparties and knowing we’re not leaking information to the wider market is very important."
MiFID’s regulatory impact on the buy-side’s ability to access dark pools in Europe would likely make itself felt in two ways – as an information challenge, and as a technology challenge, said Goodman.
In theory, the use of sell-side smart order routers to direct buy-side orders to dark pools should enable the buy-side to monitor how brokers route to venues.
“But what we have never solved as an industry is knowing what is going on, and where,” Goodman explained.
Now, there seems to be a broad consensus among the sell-side that they will use industry-agreed tags, to label each trade.
“The question is, how will people be able to access that data in a commercial way? But I think we may have solved 50% of the problem. That is the most promising development I have seen since MiFID in terms of trying to handle fragmentation,” said Goodman.
The FIX Trading Community is working on providing more detail on its messages, including introducing tags that provide more detail on where orders have been routed prior to being filled.