MiFID II caps bite as dark MTF trading volumes fall

Research from ITG shows equity trading volumes falling for dark MTFs as volume caps take hold.

MiFID II’s double volume caps (DVC) on dark pool trading are already resulting in decreasing dark multilateral trading facility (MTF) volumes, according to data from ITG.

Research from the equities broker found that since the implementation of DVCs in mid-March, the percentage of dark volume for capped securities fell from 27% to 8%, with only large-in-scale (LIS) orders have been able to continue to trade in these securities on dark MTFs. In contrast, dark MTF trading volumes for non-impacted securities remain largely unchanged at around 20%.

The majority of MTF flow for DVC-impacted securities has shifted onto lit venues, while periodic auctions and systematic internalisers claiming much smaller percentages.

In overall equities flow, systematic internalisers saw a 6% rise in volumes during Q1 this year, while traditional lit venues saw a similar increase. Periodic auctions recorded a 1% increase throughout the quarter.

“The policy objective of moving algo trading from dark pools to the lit environment appears to have been achieved. Order book and lit auction activity accounts for 83% of capped stocks volume which is 26 percentage points higher than Q4 2017”, said Duncan Higgins, head of electronic products at ITG.

“The cost of this change needs to be fully understood and will be a focus for many analysts in the coming weeks and months. Anecdotal client feedback is that large trades that need to be executed gradually are having more impact which will hurt fund performance.  In contrast large trades which can be executed as blocks are being done more efficiently.”