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EU Dark Pools Regs Blast Buy Side

The proposed 5 percent cap on dark pool trading could have a sharp impact on asset managers who need the anonymity of unlit trading venues, say critics.

European firms that trade via dark pools may have their trading activities severely curbed if the European Union gets its way. Under proposals for Markets in Financial Instruments Regulation - an update to MiFID - a volume cap mechanism would limit dark pool trading to 5 percent on every instrument on any one dark pool venue.

This limit would have a big impact on buy-side firms, say critics. Buy-side firms rely on unlit trading venues also known as dark pools to trade large blocks of shares without revealing their identities to larger, wealthier counter-parties.

[Prosecutors circling, SAC Hedge Fund may shut down.]

How would this proposed limit work? Here are some details from an excellent piece by efinancialnews:

The 5% cap would be a percentage of the total trading volumes of that instrument across the European Union over the previous 12 months. The cap on trading a particular instrument traded on all venues across the EU would be 10% of the previous year's figure.


It remains unclear whether these caps would be imposed on a daily or monthly basis but the European Securities and Markets Authority will publish total volume of EU trading per instrument in the previous year on a monthly basis.

If breached, regulators are proposing a six-month suspension for dark pool trading in the instrument and venue guilty of the breach. A similar suspension will apply across the region if the 10% threshold is exceeded.

Could such a limit come to dark pools in the US? If the major exchanges had their way, why not? Earlier this spring, the CEOs from the NYSE Euronext, Nasdaq OMX and the CME Group visited the SEC and while the exact details of the conversations were secret, the topic of dark pools did come up. The exchanges are seeing their trading volumes diminished by these dark pools and unlit trading venues and they would benefit if lawmakers and regulators were to crack down on these venues.

Add in general suspicions about “gaming the system” and the future of dark pools looks fairly uncertain.

"Politicians and European regulators need to ask themselves: do they want the market to be a market for institutional investors or day traders? They need to take a serious look at what they are providing for investors on the street," Adrian Fitzpatrick, head of investment dealing at investment manager Kames Capital tells efinancialnews.

He adds: "Dark pools are a necessity for the institutional market and by forcing trading onto exchanges you are only increasing profits for their shareholders, not benefiting the state like it used to. Institutional asset managers are always at the end of the food queue."

The updates to MiFID II and MiFIR are not set in stone and the move to launch MiFID in 2007 was slow and deliberate. That said, one regulator for the European Union said that the timetable for many of these news guidelines is "very ambitious."

Stay tuned.

[221 years young! The rich past and uncertain future of the New York Stock Exchange.]

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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