UPDATE
REGULATION
FCA study highlights dark trading cap problems
FCA finds dark trading negatively affects the market at between 11% and 17% of
market turnover, yet MiFID II’s proposed dark pool caps are set at 4% and 8%.
The UK’s financial watchdog
has found dark trading begins to
negatively affect market quality
between 11% and 17% of market
turnover, much higher than MiFID
II’s proposed dark pool caps.
The study authored by the Fi-
nancial Conduct Authority (FCA)
looked at the 350 largest UK stocks
traded across the four main trading
venues in London.
It found ‘a non-linear relation-
ship’ between the proxies of
market quality and dark trading,
meaning at higher levels dark
trading could be more harmful to
market quality.
“For our full sample of stocks,
the impact of dark trading on
market quality starts to turn sour
anywhere between 11% and 17%,
depending on the market quality
proxy being examined,” the FCA
said.
However, MiFID II’s dark pool
restrictions introduce a double vol-
ume-cap, triggering bans on certain
types of dark trading when a trans-
action accounts for 4% of the total
activity on a single dark venue, or
8% of total trading market-wide.
Trades breaching the 4% ven-
ue-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
six-month dark trading ban across
Europe.
MiFID II’s dark trading rules
have been widely debated among
industry participants. Speaking at
TradeTech earlier this year, the
dark trading caps were described
as detrimental to the market and
‘arbitrary’.
“Any regulation that limits buyers
and sellers coming together at an
agreed price is wrong for the mar-
ket place. The volume caps are very
arbitrary numbers,” said Ralston
Roberts, co-head of electronic trad-
ing at Goldman Sachs in Europe.
The FCA’s study also found of the
350 stocks in the sample, just over
8% breach the 8% cap. However,
other studies have suggested sig-
nificantly more stocks could breach
the cap.
A report from Rosenblatt Secu-
rities published in June this year
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.
Overall, 89% of stocks in the
FTSE 100 and FTSE 250 will
breach MiFID II’s dark trading
market-wide cap come January
2018, according to the study.
The FCA concluded it is import-
ant that “policy makers take care
not to eliminate the market quality
benefits of dark trading by arbitrari-
ly imposing uniform dark trading
restrictions for all stock sizes”.
Issue 53
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