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MiFID II Does Not Boost Lit Volumes

Traders Magazine Online News, February 14, 2018

Shanny Basar

Regulators may tweak new European Union regulations which were meant to increase trading on primary exchanges, as lit volumes are unchanged in the first month of implementation.

One of the aims of MiFID II, the regulation which came into force in the European Union on 3 January, was to boost lit volumes.

MiFID II places volume caps on trading of 4% of daily volume in an individual stock on any single dark venue as well as 8% of total average daily volume across all European dark pools. However the calculation for the caps were meant to be published last month and have been pushed back to March by the European Securities and Markets Authority. There are waivers for large-in-scale (LIS) orders and trading in auctions which led to a boost in volumes of block trades and periodic auctions.

Rebecca Healey, head of market structure and strategy EMEA at institutional trading network Liquidnet, said in a presentation to members last week that there is no difference in volumes of trading in lit venues since MiFID II went live as they still have a 57% share of the total market.

She said: “In general, we have not seen the big shift to lit trading the regulators were hoping for. The question is whether there will be a shift in the landscape once the caps are implemented.”

Liquidnet analysis showed that dark volumes steadily increased  last month from just over 6% of total market volume to a peak of 9.7%, reached on 24 and 30 January, before falling back. “It looks as if a natural threshold for dark activity has now been reached, similar to pre-MiFID volumes,” added Healey.

Although dark volumes are largely flat since MiFID II went live, there have been changes in the composition of dark volumes.

Gareth Exton, global execution & quantitative services at Liquidnet, said in the briefing: “There has been an explosion in periodic auctions which is not unexpected.”

Liquidnet continued that auction volumes more than doubled during the first month of MiFID II to €428m ($531m) on 2 February. However the reporting on periodic auctions does not show the proportion that is broker pre-matched, and so may not be true actionable liquidity. Healey said: “There will be pressure to reveal the pre-matched volume as regulators will want to know.”

Cboe Europe Equities said in a statement  that during the first month of MiFID II, the exchange had record volumes for both periodic auctions and LIS trading.

The Cboe Periodic Auctions book reported a volume of €6.5bn last month with average daily notional value of €296m, up 885.3% over the fourth quarter of last year.

“Data from big xyt shows that trades on the Periodic Auctions book had less market impact than dark venues,” added Cboe.

Liquidnet continued that over the month of January LIS established itself as almost a third of the dark market, with the move to block style liquidity now seemingly established.

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