UK further loosens dark trading restrictions in post-Brexit strategy

FCA has changed the UK’s approach to the double volume caps following a shift of share trading from London to the EU after Brexit.  

The UK’s financial watchdog has further relaxed rules that limit dark trading in equities as it looks to reclaim €6 billion of trading volumes that shifted from London to the EU post-Brexit.  

The Financial Conduct Authority (FCA) confirmed it has loosened its approach to dark trading and the double volume caps (DVC) that were introduced under MiFID II in Europe in 2018.  

DVCs limit the amount of dark trading that can take place under the EU law, which aims to boost the amount of trading that is executed on more transparent, lit venues.

“In December, we announced that we would not automatically apply the DVC to UK equities and we are now extending this to all equities,” the FCA said in a statement.

The UK watchdog added that in the case of equivalence it would be willing to use its temporary powers to amend this approach.

Late last year, the FCA lowered the large-in-scale (LIS) thresholds that allow dark trading in transactions above a certain size in the UK to €15,000, significantly lower than the €650,000 threshold in the EU.

The changes come as part of the regulator’s bid to win back business from large global investment firms that champion the anonymity that dark pools provide for trading of shares in bulk.

In January, research by Liquidnet revealed that UK trading venues had seen their market share in European share trading drop to 2.5% in the first two weeks following Brexit.

The activity was absorbed by EMEA based trading venues, which saw market share increase from 37% to 48.5%, and off-exchange and systematic internalisers, which saw an increase of 3% to 49%. 

More recently in February, the FCA published a report that claimed investors can save on execution costs by trading in dark pools or venues compared to more transparent venues.

In one example, the FCA said that when dark trading is not subject to bans a 10% increase in the proportion of a parent order executed in a dark venue reduces implementation shortfall by 0.97 bps.

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