European markets regulator takes another shot at ‘dark pools’

Europe’s markets regulator is boosting its campaign to limit share trading that takes place away from exchanges in so-called dark pools, concluding that sweeping new rules introduced two years ago have only been partially successful.

The European Securities and Markets Authority also suggested that EU investors and banks would continue to be able to trade UK shares in London following the end of the year, when the Brexit transition period ends. The move could help to defuse tensions between regional regulators over how to divide up oversight of Europe’s stock markets from 2021.

In a consultation paper on Wednesday, Esma said it was looking to further improve transparency in Europe’s equity markets — an objective set by its flagship legislation Mifid II, which was introduced in early 2018. But market participants complain that it has made trading more opaque.

“While we consider that [it] has been partially successful, we also see some significant remaining challenges which should be tackled by a targeted review of the legislation,” said Steven Maijoor, chair of Esma.

The changes being considered include limiting the number of regulatory waivers that allow investors to trade in a dark pool — marketplaces where the price is only disclosed after a deal has been executed.

Varghese Thomas, chief operating officer at technology provider TradingScreen, said it was a common misconception that dark trading is secretive and risky. “The truth is that dark trading exists due to strong demand from investors to trade larger volumes of stock, especially in less-liquid smaller and mid-cap stocks, where at times it can be difficult to do so on an exchange.”

Esma also wants to tighten the rules around “systematic internalises”: more lightly regulated invite-only markets that are run largely by banks and high-frequency traders. The regulator is considering restricting them to trading in illiquid shares. It estimates that close to 20 per cent of shares in Europe are traded every day in these venues, up from less than 2 per cent before the introduction of Mifid II.

It is also looking to head off a potential fight with the UK’s Financial Conduct Authority about oversight as London’s markets break away from the EU.

Esma has identified some 6,200 companies available to EU-registered investors to trade on European exchanges if the UK were to leave the single market without being granted “equivalence”, a status that allows investors to freely trade across borders.

Although Britain left the EU last week, the topic is expected to be an important bargaining chip in the trade discussions between the two sides.

Without equivalence granted by the EU, the UK — which plans to replicate Mifid II rules — may be forced to retaliate with its own list. The prospect of separation alarms EU fund managers who could face higher trading costs.

Esma said it hoped a clarification of the rules would make it “less likely that third countries will impose a trading obligation to EU shares”.

Share trading venues such as Turquoise, which is owned by the London Stock Exchange, CBOE Europe and Aquis Exchange have set up operations in the EU in case investors are barred from trading in London.


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