LONDON (Reuters) – European attempts to shift share trading from so-called dark pools, trading venues which match buyers and sellers away from regulatory scrutiny, have had limited success, a report by the European Securities and Markets Authority (ESMA) shows.
The European Union’s Markets in Financial Instruments Directive, known as MiFID II, last March brought in temporary caps on trading volumes in dark pools, where stock prices are not made public as they are on exchanges.
The caps, designed and implemented by ESMA, applied to more than 600 stocks including the majority of European and FTSE 100 index components with the aim of boosting volumes on public exchanges. The restrictions were lifted in September.
But in its first detailed report on the impact of the rules, ESMA said that while volumes in dark pools fell to less than 1 percent of the total traded in August 2018, from 7 percent in January, they rose again to above 5 percent when the ban ended.
The report also found that conditions in so-called lit exchanges improved while the caps were in place, with the size of bid-ask spreads tightening and turnover increasing, but worsened when measured by turnover ratio and average trade size.
ESMA’s analysis confirms a Reuters report in November showing that investors returned to dark pools once limits expired.
Many market participants say dark pools offer a helpful service for large investors who want to avoid prices moving against them when carrying out big trades. These private venues also often charge lower fees than public exchanges.
The report comes ahead of a March 3 deadline for ESMA to submit feedback to the European Parliament on the impact of its volume cap mechanism, among other aspects of the rules.
The report did not make recommendations or say if ESMA will take any action to tweak the rules as a result of its findings. It declined to comment further on Thursday.
Experts have said regulators may need to adjust its model to disincentivise investors from return to the dark pools.
The ESMA report also showed that trading in periodic auctions – closed intra-day auctions on exchanges – increased over the same period from virtually zero to 4 percent of the total before declining to 2 percent.
To read the full report, click here: https://bit.ly/2EmP3Ti
(Reporting by Josephine Mason; Additional reporting by Helen Reid; Editing by Alexander Smith)