[ I N D E P T H | R E G U L A T I O N ]
“ I think most market participants would agree that there ' s a case to be made for more simplicity in market regulations and I think divergence doesn ' t help that aspiration .”
ED WICKS , HEAD OF TRADING , LEGAL & GENERAL INVESTMENT MANAGEMENT
the UK must be careful what they wish for . These individuals argue that if too much trading takes place in the dark , it could lead to a degradation of the reference price in the lit market , which in turn could damage midpoint trading and prevent end investors from achieving best execution . Data by big xyt found that market share on price referencing as opposed to price forming mechanisms in the UK , including dark venues , FBAs and SIs , has grown from 12 % in the first quarter of 2018 to 21 % in the fourth quarter of this year . This number can only be expected to rise if regulatory changes make the UK a more attractive place for volumes driven out of the EU .
“ If the UK liberalises so much that price discovery becomes meaningless and we end up in a marketplace that looks more like the foreign exchange market rather than the equity market ,” says Haynes , “ It could be creating a problem that shifts more business back to Europe . So , this is going to be incredibly interesting to watch for the next year as errors could be made on both sides with pretty dramatic outcomes for the industry as a whole .”
The UK ’ s WMR – citing an FCA paper from 2017 – states that a damaging level of dark trading could range from about 11 %– 17 % and therefore the text of the proposals maintains that the level of dark trading in the UK will continue to be monitored and reserves the right for UK authorities to retain the ultimate sanction to limit dark trading should it become unmanageable . “ They will retain that handbrake , if you like , so I think there is an acknowledgement that there may be a threshold that if crossed becomes harmful to price formation or to effective market operation ,” adds Wicks .
The number of capped out stocks in the EU has remained consistently low , so many argue that this level of dark trading is difficult to reach with or without a cap . The EU also set out plans to implement a single consolidated tape for each asset class in its MiFID II amendments also going some way to alleviating concerns
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