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ITG - MiFID 2: Impact of Dark Caps on Algorithmic Trading Strategies

First Published 28th October 2015

A new paper by ITG's Alistair Cree and Colleen Ruane looks at the likely impact of the MiFID II dark pool caps on various algorithmic trading strategies. The paper analyzed 9 million algorithmic trades in Europe across a wide range of brokers, order sizes and execution venues.

Dark trading in Europe is expected to be fundamentally altered by the implementation of MiFID II/ MiFIR. The proposed cap on dark pool volumes will require all institutional investors to reevaluate how they interact with dark liquidity, but for some the impact of the changes will be greater than for others.

This research examines the potential impact on a variety of algorithmic strategies. In particular we focus on the varying degrees to which different strategies participate in dark trading and how much of that volume is traded in sizes which qualify for the Large In Scale (LIS) waiver and so are exempt from the cap.

In brief we find that:

  • The portion of dark volume executed LIS increases with order size. Merging algorithmic orders to increase order size where possible may prove a useful tactic for maintaining access to dark liquidity in the event that dark trading is suspended.
  • There is significant variation in different institutions' use of dark liquidity. Institutions that trade more heavily in the dark also make greater use of LIS executions.


As is currently understood, dark trading regulated by MiFID II/MiFIR will differ from the present regime in three significant ways. Firstly, the closure of Broker Crossing Networks (BCNs) will limit brokers' capacity to cross client order flow internally. Secondly, dark pool trading on MTFs will be limited to execution at the midpoint only. Finally, caps will be implemented on the volume trading both on any individual venue at 4% of market volume and on the market as a whole at 8% of market volume. ESMA will calculate the dark volumes for each venue and the market as a whole on a stock-specific basis over a rolling 12 month window. In the event that ESMA determines that the cap has been breached, dark trading for that security will be suspended for the next 6 months, either in the specific pool or for all dark pools.i In this paper we focus on the potential effects of such a suspension of all dark trading for a security.

Estimating present dark volumes is inherently difficult given the fragmented nature of European markets and the absence of a consolidated tape. Most estimates place dark volumes in the range of 6 - 10% of total volumes but these estimates can vary significantly between markets and securities. For example, for the period from 2014-04-01 to 2015-03-31, Fidessa estimates European dark volumes at 6.1% of total for Europe as a whole but at 9.5% for the UK and 7.0% for Sweden.ii


Under MiFID, orders submitted to venues above certain sizes may be exempted from MiFID's pre-trade transparency requirements under the Large In Scale waiver (LIS). One important subtlety of the proposed dark pool cap is that LIS executions will be exempted from both the calculation of the dark pool cap and any subsequent suspension of dark trading. Whether or not a venue order is large enough to qualify for LIS depends both on the order's size and the average daily turnover of the security (ADT). Table 1 shows the current LIS thresholds set out by MiFID.

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