UK, Irish shares may be worst hit by Mifid II dark pool trade cap
UK and Irish stocks will be among the hardest hit by EU regulations that seek to limit off-exchange securities trading, according to a report based on data from one of the digital venues for the so-called dark pools. A trading volume threshold will be introduced when the Mifid II rules come into force in January, potentially limiting trading in 757 stocks across 18 European indexes. Trade in 89% of FTSE 100 and FTSE 250 stocks are likely to be affected, said the report by brokerage Rosenblatt Securities, based on Bats Europe data.
Research has found 89% of stocks in the FTSE 100 and FTSE 250 will breach MiFID II’s dark trading market-wide cap come January 2018.

A report from Rosenblatt Securities measured how the dark trading caps would affect trading in 757 stocks across 18 major European indexes, with data provided by Bats Europe.

It found just fewer than three-quarters of stocks would hit the 8% threshold, with UK and Irish stocks hit hardest.

MiFID II’s dark pool restrictions will see the introduction of a double volume-cap, which will trigger bans on certain types of dark trading when a transaction accounts for 4% of the total activity on a single dark venue, or 8% of total trading market-wide.

Trades breaching the 4% venue-specific cap will be subject to a 6-month ban on the venue in question, while issues exceeding the 8% market-wide cap trigger a 6-month dark trading ban across Europe.

Market participants have slammed the dark pool caps as restricting the most effective method of trading.

Panellists at TradeTech earlier this year agreed dark pool trading allows for minimal market impact and often provides the best price for clients, but MiFID II will stifle this with the introduction of double volume caps.

“Any regulation that limits buyers and sellers coming together at an agreed price is wrong for the market place. The volume caps are very arbitrage numbers,” said Ralston Roberts, co-head of electronic trading at Goldman Sachs in Europe.

The report also fund less-liquid issues will suffer disproportionately under the caps, with 83% of mid-cap index constituents set to breach the 8% threshold, compared with 67% of large-cap index constituents.

“These names are already difficult to trade, which makes dark pools an appealing alternative for buy-side traders seeking to minimise information leakage and market impact,” said Anish Puaar, author of the report and European market structure analyst at Rosenblatt Securities.

“It will be interesting to see how restrictions on trading these stocks in the dark affect investor outcomes under MiFID II.”