The future of dark pools has been a prominent topic at TradeTech Europe 2014, as the market prepares for changes as a result of incoming MiFID II regulation.
Discussions at the conference in Paris have proved that market participants will be looking at smarter ways to trade in the dark post-MiFID II, with a panel yesterday saying sophisticated electronic trading solutions may be the answer.
When the regulation takes effect, dark trading will be capped at 4% of all trading in a given name for a particular venue and 8% across the market as a whole.
However, the rule only affects trades made under the reference price waiver and some aspects of the negotiated trade waiver. Trades executed using the existing large-in-scale pre-trade transparency waiver, which permits trades above a certain size to be executed off-exchange, is not impacted. The European Parliament has yet to vote through the rules.
Mark Goodman, head of quantitative electronic services at Societe Generale, said if MiFID II stayed in its current form, the market would see more fragmentation as a result.
“You have to move to a multilateral trading facility model if you’re currently running a BCM, but you can only do your client-to-client crossing in that,” Goodman said.
“But if your client wishes to trade with, for example, the derivatives hedging flow, we can only do that within the systematic internaliser, so you have the possibility of going from one dark pool to two just to do what you are already doing today.”
As for cap restrictions, Goodman said more people would use the large-in-scale waiver, possibly increasing average trade sizes. “I think that’s what everybody wanted when dark pools first came along.”
Societe Generale was staying put until talks with the European Securities and Markets Authority (ESMA), which would implement the new rules, are completed, however. “We need to listen to what comes out of discussions with ESMA and how they are going to interpret different waivers.”
David Howson, chief operating officer of BATS Chi-X Europe, said there are several questions the pan-European regulators would have to answer.
“It’s going to be interesting with the 4% and 8% cap in Level 1 of the implementation regulation,” he said. “That’s going to create difficulties, with uncertainty around how the caps are going to be calculated – 4% and 8% of what? When is it calculated? Is it monthly or daily?
“And that uncertainty means that your decision to trade, where to trade and how to trade is going to be impaired, which is will be a challenge for the market.”
Brian Schwieger, head of equities at the London Stock Exchange Group, said dark pools will have to make sure trades are flagged appropriately post-MiFID II.
“At the moment, all dark pools are operating using the reference price waver,” he said. “It will be important for them to be able to flag when they have a large-in-scale order so it doesn’t account against caps.”
He suspected conditional order types will also be more popular, bringing together fragmented orders.
According to Jean-Marie Fremion, managing director, sales at AQX Securities, dark pools will only become bigger. “Everyone knows the advantages of trading in dark pools,” he said.
“You need technology, and you need to be fast and intelligent in the way you trade. But I think the major brokers have a lot of money on the table to develop new tools to be efficient in dark pools."