Industry experts slam ‘arbitrary’ dark trading restrictions

'All-star’ panel at TradeTech agree dark trading rules under MiFID II will negatively impact the market.

Senior electronic traders believe stricter caps for trading on dark venues under MiFID II will negatively impact the market by restricting the most effective method of trading. 

Speaking at TradeTech in Paris this week, panellists agreed dark pool trading allows for minimal market impact and often provides the best price for clients, but MiFID II will stifle this with the introduction of double volume caps.  

“Any regulation that limits buyers and sellers coming together at an agreed price is wrong for the market place. The volume caps are very arbitrage numbers,” said Ralston Roberts, co-head of electronic trading at Goldman Sachs in Europe. 

Rob Boardman, CEO at ITG in Europe added the caps are “clearly a political compromise.” 

Panellists also agreed a significant amount of stocks will be capped on 3 January 2018 – the deadline for MiFID II implementation – and the market will have to adjust to those changes.  

Richard Semark, managing director at CEO of UBS MTF, added the capping of stocks has posed more questions for market participants.  

“It’s a game theory. As the stock approaches the 8% cap, do all the venues turn off trading that stock? It’s hard to know ahead of time what the answer to that question will be, but we will see a lot of stocks capped on 3 January,” he said.  

Dark trading restrictions are expected to cause a shift towards block trading or trading on lit platforms, the panel agreed, with large-in-scale trading venues becoming the favoured method of dark trading.  

Boardman concluded: “Large-in-scale and systematic internaliser proliferation following MiFID II will be significant over the next few years.” 

The industry is already feeling the effects of dark trading restrictions and a shift towards block trading venues is happening well ahead of the January 2018 deadline. 

In February, Deutsche Bourse confirmed it would be implementing a new trading system in anticipation of MiFID II‘s large-in-scale waiver and there would be no reason to continue dark pool trading for small-size transactions.

“Xetra MidPoint today supports dark trading for all trade sizes. With the volume thresholds of 4% and 8% in the reference price waiver we see limited potential for this transparency waiver,” the exchange operator said at the time. 

At the same time, block trading initiatives and venues from the likes of Bats Europe, Euronext, the London Stock Exchange’s Turquoise Plato and Liquidnet, are gaining significant traction ahead of MiFID II.