ESMA delays MiFID II rules on dark pool caps

ESMA delays MiFID II rules on dark pool caps

The European Securities and Markets Authority (ESMA) has delayed the introduction of new rules on dark pool trading, a key part of its MiFID II initiative.

The announcement was made late on Tuesday and has been seen as a blow to its efforts to bring more transparency to equity trading in Europe.

The rule, originally set to be introduced on Friday, will now be delayed for a minimum of three months as the regulator looks to work with trading venues to compile the data necessary to make the measure effective. 

Dark pools are private execution venues that disclose prices once a trade has already been made and are popular with trading firms and fund managers keen to avoid any market impact from transacting large volumes on public exchanges. 

ESMA has been keen to reduce the amount of dark pool trading that takes place within the EU due to fears it reduces transparency and affects market integrity. 

However incomplete data from a number of trading venues means that publishing the list of European equities due to be excluded from trading via dark pools would be "a biased picture covering only a very limited number of instruments and markets" said ESMA. 

The regulator stated that it received data from three-quarters of trading venues but that data covered just 650 instruments or 2% of the exepcted total. 

MiFID II rules include two volume caps on dark pool trading - just 4% of total trading of a single stock can take place in any one dark pool over a 12 month period and total dark pool trading is limited to 8% of total trading volume. The penalties for breaching these rules is a six month prohibition on trading of that stock in either the dark pool venue that breached the cap or from all dark pool trading.

Hundreds of European equities would have been caught under the new rules but have now been granted a temporary reprieve.

While the deferment will be welcomed by a number of trading firms, others have criticised the way that the rule was calculated and introduced.

Steve Grob, head of trading technology firm Fidessa, says that ESMA is facing its first 'Heisenberg moment' in reference to the German physicist's Uncertainty Principle that you can either know the position of a particle or its velocity but not both. He says that ESMA is realising "the difficulty in calculating something as seemingly simple as the dark pool caps".

"Simply shipping truckloads of data from participants to regulators is no slam-dunk for greater transparency, safer markets or better trading outcomes," says Grob.

The blame however should not be levelled at ESMA but at its "political masters who have sought to dumb down financial markets into juicy soundbites in order to show they are being firm but fair," he says.

"The case for dark pool caps and their levels was never satisfactorily made. And to make matters worse, the data will be meaningless whilst the 2017 reporting regime overlaps with its completely different 2018 version," says Grob. 

Meanwhile others such as trading venue Liquidnet have argued that the idea that dark pool caps would limit the amount of ofrf-exchange trading is a moot point as traders are already looking at alternative trading methods not subject to caps. 

"It's frustrating for the industry but its better that ESMA resets, as the volumes caps were unlikely to meet the objectives of the European politicians," said Rebecca Healey, Liquidnet's head of Emea market structure, speaking to the Financial Times. 


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