21 November 2013

Reuters: EU reaches outline deal to cap dark pool share trading

Markus Ferber, the German centre-right lawmaker who is leading the negotiations for the European Parliament, said Thursday's outline deal would form the basis for further negotiations on how to make it work in practice. "There are still some questions open. The whole system has to be made functional", Ferber told Reuters. "My planning is to have a deal before Christmas", he said, referring to the MiFID reform as a whole.

The main advantage to dark pools is that investors do not have to make their orders public. This helps to prevent other market participants knowing who is behind a large trading position and make it possible to bet against it.

Under the outline plan, trading in a stock anonymously will be capped at 8 per cent of the total amount traded of that stock in the EU, meaning that most of the trading would have to be on exchanges or similarly "lit" as opposed to "dark" trading platforms. So-called dark pool trading in a stock on an individual platform would be restricted to no more than 4 per cent of the total EU market for that stock.

The EU's executive European Commission will conduct further work on how the caps would work in practice, such as what happens when a cap is breached, and how often the data on dark pool trading is published. Ferber said he would be concerned if checks on whether the caps are busted were only done on the basis of monthly data, a period seen as too long.

Britain's Investment Management Association said the caps would ultimately hit end investors and pension funds as it poses a restriction on the industry's ability to get the best price for their clients. "It would be far better to address and rectify any concerns with regards to the practice of 'dark trading' if the industry and regulators can work together to come up with positive solutions", IMA markets expert Arjun Singh-Muchelle said.

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Lithuania, which holds the presidency of the European Council, said that “a preliminary agreement” had been reached. “Everything is of course then subject to an approval by the Member States as part of an overall MiFID II package", it said in a statement.

The parties also agreed not to introduce a separate category of trading venue for equities, which could have hit banks’ equity trading operations. However, the parties could not agree on rules that would allow third parties access to exchanges trading listed derivatives.

Contracts that are traded at a venue are typically processed through the exchange’s clearing house, in effect locking investors into a so-called “vertical silo”. To break it open, policy-makers would have to agree that derivatives products owned by exchanges be made fungible, or interchangeable with rival products. That could potentially open the region’s two main derivatives exchanges, Deutsche Börse and IntercontinentalExchange’s Liffe to competition in listed derivatives.

Further reporting © Financial Times (subscription)

© Reuters