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MiFID II Increases Trading Costs

Traders Magazine Online News, December 13, 2018

Shanny Basar

New European Union regulations that went live at the start of this year have shifted equity trading volumes to lit venues as intended, but have resulted in higher trading costs according to research from ITG.

The broker analysed more than 25 million algorithmic equity trades in the EU and found that lit volume rose from 64% of total volume in the fourth quarter of last year  to 70% in the first several weeks of 2018. Lit volume also rose again to 74% after the double volume caps came into force on March 12 and dark volume dropped from 23% to 16%.

The first volume caps, published in March by the European Securities and Markets Authority, suspended more than 750 stocks from being traded in dark pools for six months as they exceeded the limit of 4% of total volume on a single venue in the past 12 months and 8% combined across all EU dark pools.

Duncan Higgins, head of electronic products at ITG Europe, told Markets Media there has been a significant increase in volumes on traditional lit markets, especially on stocks that were subject to the caps. For algorithmic trading by institutional investors, lit venue use increased from 58% to 77% according to ITG.

"The regulatory push to boost trading activity on lit markets achieved its goal, but it has also likely subjected European investors to higher trading costs,” added Higgins. “We hope the new picture of realised costs will be considered by policymakers before they make any further changes that limit investors’ access to alternative venues with lower average trading costs."

Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, told Markets Media there needs to be an industry debate over what regulators intended MiFID II to deliver and the future direction. Esma was scheduled to review MiFID II in 2020 as part of a technical review but due to the UK’s departure from the EU, she said this review is likely to have more political involvement and will be more extensive than previously anticipated.

Healey said: “The desired shift of volumes to continuous lit markets has not been accomplished in the manner certain regulators required.  However the question we need to be asking is why investors do not like trading in continuous lit markets but prefer alternative methods to execute their trades. Until we can resolve this issue, regulators will continually be attempting to catch up with market innovation.”

Review of periodic auctions

Large-in-scale trades above a specified size and trades in periodic auctions on lit venues are both exempt from the MiFID II volume caps, so their volumes have risen and are expected to continue to increase. Last month Esma issued call for evidence on periodic auctions which last for very short periods of time during the trading day and are triggered by market participants, rather than the venue.

Steven Maijoor, chair of Esma, said in a statement: “Using this evidence, we will assess whether they can be used to circumvent the double volume caps and other pre-trade transparency requirements under MiFID II. If Esma comes to the conclusion that frequent batch auction systems violate the spirit and the rules of MiFID II, we will develop appropriate policy responses.”

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