Trading in dark pools halved and large-in-scale (LIS) activity dropped slightly across Europe during the first week MiFID II’s of double volume caps (DVCs), according to new data from Thomson Reuters.
The Thomson Reuters March Share Reporter analysed activity between 12 March, the day MiFID II’s DVCs were implemented, and 16 March with a clear indication that volumes in dark pools are declining.
Trading in dark pools halved to 3.06% market share of on-book trading from 6.15%, while LIS trading fell slightly to 1.25% market share of on-book trading from 1.43%.
LIS and block trading venues were widely expected to benefit from significant growth once the DVCs were introduced across Europe, which limit the ability to trade in dark pools. In comparison however, periodic auctions have doubled their share of on-book trading from 0.64% to 1.23% during the same time frame.
Periodic auctions have proved to be a popular venue amongst traders looking to avoid the DVCs with providers like Cboe Global Markets seeing record activity on the day the caps were introduced.
Earlier this week UBS told Bloomberg it is planning to launch its own periodic auction service in a bid to help its clients trade stocks that have been suspended by the DVCs.
Favouring auctions
One of the fundamental objectives of MiFID II, which came into force on 3 January, was to shift trading on dark venues towards on-exchange or lit order books for greater transparency, but early statistics suggest traders are favouring alternative venues such as periodic auctions.
“The double volume caps for dark pool trading is designed to increase transparency and move transactions onto lit markets. With the caps only in effect for just over a week, the early signs are that liquidity has moved to periodic auctions,” said John Mason, head of regulatory and market structure strategic response at Thomson Reuters.
“If the result of the trading caps is to shift trading out of dark pools into periodic auctions, then the regulator has not really achieved what it was trying to. It is interesting to see that use of the large in scale waiver is unchanged so far.
“Expectations were that this would become more popular once the caps were in place as firms grouped orders together into blocks large enough to qualify. Doing this depends on sophisticated execution management.”
The European Securities Markets Authority (ESMA) was forced to delay the initial implementation of the DVCs during the first week of the new regulatory regime to 12 March, due to a lack of complete data from exchange operators to calculate effective caps.
The data was finally published earlier this month and it showed a total of 744 instruments in January and 643 in February this year hit either the 4% or 8% dark trading threshold.
Mason concluded: “With increased scrutiny of trading best execution imminent as new MiFID reporting requirements start to bite in the months ahead, firms are dependent on using all the new data on trading that exists thanks to MiFID II. The way the market responds to the double volume caps is an important part of the picture.”