Turquoise, a broker-backed multilateral trading facility, has become the second European trading venue in a matter of days to announce discussions with regulators over its dark trading functionality.
“We are in discussions with the regulators and CESR in order to understand what their expectations are and what we can offer the market in terms of non-displayed functionality,” Ian Werner, head of legal, compliance and regulatory affairs, Turquoise, told theTRADEnews.com. “We are in advanced discussions with the Financial Services Authority (FSA) for an enhancement to our current dark functionality and we hope to be able to offer this enhancement soon, subject to regulatory approval.”
The development follows a request by the FSA for adjustments to the operations of NYFIX Euro Millennium, one of the first dark pools to enter the market. In its annual results statement, published last Thursday, NYFIX said that the UK regulator has “proposed an interpretation of a particular provision of MiFID that would require modifications to Euro Millennium’s current functionality”.
The regulators’ concerns are thought to focus on the pre-trade transparency waivers that dark trading venues can use to maintain anonymity of dark or hidden orders by not publishing pre-trade data. Presently, this can be done in three ways: a large in scale (LIS) waiver, where orders must be of a minimum size, based on the average daily turnover and market capitalisation of a stock, as defined by the Committee of European Securities Regulators; a pegged-to-reference waiver, where quotes are pegged to those on a primary exchange; or an order management system waiver, which can include functionality such as iceberg orders.
Any modifications to Turquoise may be centered around its use of a different order type. Turquoise currently offers dark-only orders, which are normally pegged to the European best bid and offer (EBBO), as well order types that can be used on its integrated order book, which offers both displayed and non-displayed liquidity. Both of these currently have to comply with large in scale restrictions.
At the moment, regulatory limitations mean pegged orders can only match with other pegged orders. Furthermore, large in scale orders can only execute against pegged, dark-only orders if they too are pegged and therefore unable to interact with any visible orders or other order types. Turquoise argues that the limited nature of the order types they are currently allowed to offer could force traders to over-the-counter or upstairs markets and have a detrimental effect on price formation.
“There is a need in the market to get large institutional size business done without leaving a footprint in the market,” added Werner. “However many execution opportunities for LIS orders are limited through the narrow interpretation of the various pre-trade transparency waivers. We believe that immediate post-trade transparency at optimal size is pre trade transparency for the next trade and the current narrow interpretation on pre-trade transparency by the regulators forces the business to be done away from platforms offering this post trade transparency certainty.”
Although denying it has issued new interpretations of pre-trade transparency waivers, the FSA said it was continuing to work with execution venues that offer dark order types on their compliance with MiFID’s pre-trade transparency regulations.