ESMA delays MiFID II dark trading rules in first major implementation hurdle

Industry sees first major regulatory hurdle as ESMA cites insufficient data as reason for delay to dark trading requirements.

Just one week into the new regime, the implementation of MiFID II’s new rules for dark trading have been delayed until March.

The European Securities and Markets Authority (ESMA) said in a statement released on 9 January that the data received from trading venues since MiFID II went live six days earlier was insufficient and does not allow for a ‘meaningful’ and ‘comprehensive’ calculation of the planned double volume caps (DVC).

MiFID II introduced double volume caps, triggering bans on certain types of dark trading when a transaction accounts for 4% of the total activity on a single dark venue, or 8% of total trading market-wide. The purpose of the new rules on dark trading is in-line with the European watchdog’s overall aim of pushing more trading onto lit venues and exchanges where pricing is fully transparent. 

However, ESMA said it received complete data for just 2%, or 650 instruments of the total 30,000, from 75% of trading venues and the majority of files did not cover the required 12-month period from January to December 2017. 

“As the publication of the calculations triggers other legal obligations in terms of transparency waivers’ suspensions related to dark trading, initiating the new regime based on the insufficient data ESMA has received is not appropriate at this stage,” the ESMA statement said. 

ESMA added it is already working alongside trading venues and national competent authorities (NCAs) to bridge the data gap and expects the technical and reporting problems can be overcome within the next few weeks. The regulator has said it intends to publish the data covering the previous periods, in order to ensure the full application of the caps, as of January 2018.

According to figures from TABB Group and big xyt, European equity trading volumes on dark venues remained flat over the first few days of the MiFID II regime. Over 3 and 4 January dark books accounted for 4.2% of total trading volumes, valued at $6.12 billion, compared with a yearly average volume of 5% throughout 2017.

Rebecca Healey, head of market structure and strategy at Liquidnet EMEA, told The TRADE that the concept of the double volume caps was “incredibly flawed” considering that systematic internalisers, also introduced as part of MiFID II, are exempt from the rules.

“The delay is a sensible decision, although I’m yet to meet anyone who thinks the double volume caps are a good idea,” said Healey. “The dark trading rules under MiFID II provided a political answer to the perceived problem of dark pools, but in actual fact there is a much more fundamental debate that needs to happen about what the true purpose of a dark pool is.”

Meanwhile, Duncan Higgins, head of electronic products at equities broker ITG, said the postponement will provide the industry with breathing room to prepare.

“Despite the delay we still expect to see continued growth in Large in Scale (LIS) and periodic auction trading, in preparation for the caps coming into effect on the revised timescales in March,” said Higgins.