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D A R K
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T
he day-one impact of the cap
on dark trading using the
Negotiated Trade Waiver
(NTW) and the Reference Price
Waiver (RPW) will hit large and
midcap stocks hard. The rules will
mean that smart order routers
looking for non-lit liquidity will find
most familiar routes boarded up.
“We suspect that large numbers
of index names across Europe will
be capped,” says Rob Boardman,
managing director and chief exec-
utive officer for Europe at agency
broker ITG. “I am talking many,
“We think the flow will go
in multiple directions.”
MARK HEMSLEY,
PRESIDENT FOR EUROPE, CBOE
many hundreds of names. We also
think in the UK, where dark trad-
ing is at its most prevalent, that will
run right through to the mid-caps
and the FTSE 250 as well, which
will be particularly problematic.”
Trading on lit markets and on
markets using the large-in-scale
(LIS) waiver will not be affected,
but the exact level of trading of
non-LIS that occurs in the dark is
open to market analysis. While re-
search into dark trading by market
structure specialist broker Rosen-
blatt estimates that dark trading in
Europe has hit around 8%, Michael
Horan, head of trading at Pershing,
says that the proportion of dark
trading in stocks can be up to 20%
in some cases.
“I would say for around half of the
stocks in the FTSE 100, dark liquid-
ity trading using the NTW and the
RPW is around 15-20%,” he says.
The caps for trading are applied
to the NTW and RPW, with a 4%
60
TheTrade
Winter 2017
cap on their use applied to a specific venue and an 8%
cap applied to the entire European market for a given
stock. Officially they will be applied, mid-week, from
Wednesday 3 January 2018.
“It’s based on a rolling stock 12 month average, so
they started the count from January this year - which
many people do not realise, thinking it starts from Jan-
uary 2018 - so they have already been working out the
average usage of the reference price waiver and the
negotiated waiver,” explains Horan. “What we think
will happen is that dark pools using those two waivers
will be banned on day one.”
Richard Semark, managing director for equities at
UBS and CEO of UBS MTF, says that the exact point
at which the rolling stock data will be published is not
certain, and that the caps may only come into effect as
late as mid-January.
“We think they may not publish that data until
sometime in the week beginning 8th January,” he says.
“The market has not had much of a chance to respond
to this and once that first six month suspension is
complete you may see venues voluntarily turning
stocks off.”
Execution impacted
The routing of orders and measurement of execu-
tion quality will be challenged by the shift in market
structure, which will see liquidity migrate from broker
crossing networks to lit and LIS venues, as both smart
order routers (SORs) and transaction cost analysis
(TCA) use historical data sets to help quantify best
execution opportunities and assessment.
“Historical data will be of less validity that people
have been used to for the last 10 years or more,” notes
Semark.
As a result, new data sets will have to be built up
in order to assess execution against the new market
structure, with sell-side firms reassessing the liquidity
picture.
“Most brokers, when they assemble historic volume
profiles for venues or trading over the day tend to
look at 3-4 weeks,” says Boardman. “When looking
back more than that you are seeing different market
conditions, and if you look back less than that you are
looking at a smaller data set. So the first month will be
the greatest challenge [for execution].”
That does not mean trading will become settled after
the first month however. The fluidity of stocks moving
in and out of suspension for waivers will change and
trading will be affected as a result.