Traders not convinced of shift to lit markets under MiFID II

Only 26% of traders believe dark liquidity will shift towards lit venues under MiFID II regime in Europe.

Just one in four traders are confident that dark liquidity will shift to lit markets under the MiFID II regime in Europe, according to a survey carried out by SIX Group.

The survey of traders in shares, fixed income, structured products and exchange-traded funds (ETFs) suggests that traders are divided as to where dark liquidity on capped stocks will migrate towards instead of lit markets.

Just over 30% of respondents said it will migrate to block trading venues, while 23% said systematic internalisers (SIs) and 20% predicted periodic auctions.

“This variance in responses highlights the reigning uncertainty among traders,” commented Tony Shaw, director of the London office for securities & exchanges at SIX, commented. “Over time, market developments will provide more conclusive answers on the success of MiFID II.”

The debate around where order flow will shift towards post-MiFID II has long-been debated among industry participants. Early indicators suggest that between them, periodic auctions, SIs and block trading venues have swept up dark liquidity since the regulation was introduced on 3 January this year.

Statistics from Fidessa published earlier this month showed that block trades now account for a record half of all dark trading. At the same time, research from ITG revealed that the double volume caps under MiFID II have caused a material decline in dark multilateral trading facility (MTF) volumes since they were introduced in March.  

SIX Group’s survey found that despite a lack of confidence on a migration towards lit markets, a majority of 70% of traders agreed that MiFID II has  made trading more transparent.

Furthermore, although MiFID II remains a concern among the trading community, it is no longer considered to be the biggest challenge in 2018. Those surveyed who said regulation like MiFID II was the biggest risk fell to 46% this year, compared to 73% last year.

“Despite the optimism of some traders, there is no consensus on whether MiFID II can be deemed a success,” Shaw added. “Our research demonstrates a large difference of opinion among market participants.”

In terms of challenges of complying with MiFID II, 86% of traders stated that reporting is the most problematic, with 50% citing transaction reporting and 36% said best execution reporting.