Dark pools around the globe are under constant regulatory scrutiny. The Australian and Canadian regulators now require dark trades to offer meaningful price improvement over lit markets. While Brussels-based technocrats still toy with the idea of volume caps, a recent open letter from a large group of industry representatives lobbied for the “meaningful improvement” rule to be applied in Europe too.

While this may appear easy to implement and a sensible compromise in the global debate, its impact would be far-reaching. Under the MiFID regime, unless the client has stated otherwise, brokers are required to make all client orders public. So whenever a broker detects an internalisation opportunity between two clients, one order is most likely already on a lit venue. Usually, the broker would pull the resting order from the venue and match it internally, but you can’t improve on the touch if your order is at the touch! With brokers finding it difficult to internalise client orders, they might well favour routing them to an exchange-sponsored dark pool instead, and in so doing keep the bid/ask spread artificially wide. This would at least allow them to still internalise because their client order has not decreased the (visible) spread.

Whether MiFID II wants to go down this path is open for debate. Regardless of volume caps or meaningful improvement, internalisation and dark pools look set to change in Europe.