The European markets regulator has finally released a long-delayed list of stocks which will be affected by the Mifid II cap on "dark pool" trading, covering the shares of some of the biggest household names across Europe.
If more than four per cent of stocks are traded "in the dark" on any particular venue on a 12-month rolling period, or eight per cent market-wide, dark pool trading in that stock will be suspended for six months. Dark pools allow investors to trade without having to reveal what they are buying or selling.
The European Securities and Markets Authority (Esma) today said 17 instruments for January and 10 for February passed the four per cent threshold of dark pool trading on a single venue over the past year.
There were another 727 instruments in January and 633 last month which hit eight per cent in dark pools across the whole of the EU.
“Hopefully we will start to see the intent of Mifid II take place, which will be a shift away from internalisation and opacity to much more centralisation and transparency," said Alasdair Haynes, founder of challenger equities exchange Aquis.
John Mason, of Thomson Reuters Financial & Risk, added: “Mifid II as a whole will have a radical impact on how equities and other instruments are traded, but it will take time to see how the market responds.
"Firms will be looking at different strategies to buy or sell large blocks of shares, but the market is highly dynamic so they will also have to adjust to the choices that other firms take. How the market settles will dictate whether the regulators have succeeded or failed in achieving their Mifid II objectives.”
Mifid II was aimed at increasing transparency across markets, helping assure investors that the firms and brokers they deal with are transacting at the best possible price.
The dark pool volume caps were originally scheduled to kick in on 12 January. However Esma was unable to publish a list of the stocks which would be affected, blaming exchanges for applying "incomplete data", which effectively rendered the rule useless since Esma would not know if a cap had been reached.
What is the dark pool volume cap?
Dark pools were originally designed so that large deals could be executed without immediately affecting the market price of the stock.
But in recent times, dark pools have been increasingly used for smaller trades by asset managers and investors simply seeking privacy.
The second Markets in Financial Instruments Directive, or Mifid II, put a cap on the amount of a stock which can be traded "in the dark". If more than four per cent of a stock is traded in the dark on any particular venue on a 12-month rolling period, or eight per cent market-wide, trading in that stock will be suspended.
Under the new rules, firms which do actually want to trade large volumes of stock can seek a waiver from the regulator, so it will not count towards the volume cap.
They can also use systematic internalisers – investment firms and banks which can execute client orders on their own account – as a more private alternative to "lit-book" trading venues.
Mifid II came into force on 3rd January, with a few wobbles as certain big-name exchanges were granted a last-minute reprieve from "open access" rules.