Periodic auction growth not driven by MiFID II dark trading rules, says FCA

The FCA appears to take a more relaxed approach to periodic auctions, while asset managers and other regulators remain concerned about their lack of transparency.

The UK’s financial watchdog has said that the growth in periodic auctions has not been a direct result of the double volume caps (DVCs) for dark trading under MiFID II.

The Financial Conduct Authority (FCA) explained that if the DVCs were driving trading out of the dark into periodic auctions, then it would expect to see a much larger increase for the shares subject to dark trading bans, but research it has carried out does not depict this.  

“There is in fact little difference between the increase in periodic auction volume relative to pre-MiFID II levels for those shares subject to dark trading bans under the DVC compared with shares for which dark trading is still allowed – although starting from a very low base,” the FCA’s research stated.

“While we have anecdotal evidence that some market participants are indeed switching from dark trading to periodic auctions in response to the DVC, these data strongly suggest that this is not the whole story.”

Periodic auctions have seen substantial growth following the introduction of the DVCs on 12 March, but despite issues having been raised about their lack of transparency, the research suggests that the UK’s financial regulator has taken a more relaxed approach to periodic auctions.

Senior asset managers and other regulators in Europe, including the Autorité des Marchés Financiers (AMF) in France, have expressed more severe concerns around the growth in periodic auctions, in some cases suggesting they are in fact circumnavigating dark trading rules under MiFID II.

Just last week, the European Securities and Markets Authority (ESMA) said it had observed significant volumes shifting towards periodic auction trading systems since the first suspension of dark trading in March.

“These developments have caught our attention and has triggered a concern that some periodic auction systems may be designed with the intention to circumvent the double volume cap,” said Steven Maijoor, chair of ESMA. “Therefore, we are currently carrying out a fact-finding exercise on the different periodic auction trading systems to understand the various features of these systems.”

The FCA has countered that the industry is still in the early stages of the MiFID II regime, and market participants are continuing to adapt to the infrastructures providers continue to develop.

It added that further analysis of the equity trading landscape as a whole, including the design, calibration and use of periodic auctions within it, will be carried out to understand how these align with the intentions of MiFID II