Rebecca Healey, TABB Group
"The proposed regulation is more likely to alter the mix of dark activity, rather than necessarily impact underlying volumes."
London and New York - According to new TABB Group research, the imposition of MiFID II's Dark Trading Double Volume Cap (DVC) is intended to increase transparency in European equity markets by reducing dark activity, but there are important exceptions to the DVC.
"It does not cover all types of dark trading or all venues," says Rebecca Healey, a TABB Group Europe consulting analyst who authored "MiFID II Double Volume Cap: Slam Dunk or Air Ball?" Establishing which trades will fall under the DVC and when may prove just as onerous as calculating the DVC itself, she adds. "The proposed regulation is more likely to alter the mix of dark activity, rather than necessarily impact underlying volumes."
The 18-page, 3-exhibit report provides a detailed look at the new obligations to establish what they will entail for participants globally. Calculations for the DVC will not include transactions executed by Systematic Internalizers (SIs) or OTC activity. Only trading executed on trading venues, regulated markets, exchanges and MTFs will be impacted. In addition calculations for the DVC will not include transactions under the Large-in-Scale order waiver, the Order Management waiver or a subset of transactions executed under the Negotiated Transaction waiver.
How the cap will work in practice will be challenging, Healey warns. For firms that owe best-execution obligations to their institutional investor clients, this can present a marketing opportunity in terms of their technology capabilities. New innovative models are already emerging to meet the challenges and are likely to be just the start of a new round of industry innovation. "The imposition of the DVC will not automatically deliver a reduction in dark trading, but we may inadvertently end up with a concentration of trading activity on a reduced number of venues where the technology capabilities are strongest."
The current political situation is unlikely to provide any immediate solutions. Although the European Parliament inserted a clause for the European Commission to review the DVC in March 2019, nothing will be in place by January 2017 when a harmonized calculation methodology across trading venues, including single-counted transactions, will be required.
"The level of complexity surrounding order execution and necessary data to be passed onto participants and regulators highlights the need for greater technology and innovation to ensure compliance with European regulation, favouring those participants who are willing to make the necessary investment," says Healey. "In looking to reduce the amount of dark activity, the regulators may unwittingly have shot an air ball rather than the slam dunk they had hoped for. Once again, European equity and now equity-like trading is set to become far more complex in the pursuit of best execution."
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