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THE DARK TRADING DEBACLE does anyone even care ?
Following a last-minute decision from Brussels in March to plug an accidental regulatory loophole , Annabel Smith explores what might ’ ve happened if the European market was left with no caps on dark trading and whether the events signal a wider issue in the European regulatory machine .
From page 1 - leaving an unintentional window with no caps thanks to the clerical error . Brussels subsequently began exploring possible ways to close the loophole in the new share trading rules . In the last days of March , the European Commission subsequently rushed through a last-minute draft revision to its Mifir text to plug the loophole , keeping the DVCs in place until the implementation of the new single volume cap .
The regulator ’ s mistake and subsequent decision to fix it has re-sparked an existing discussion around why watchdogs are focusing their attentions on micro changes to regimes and not on the wider issue around low volumes in Europe – especially when the result has little to no impact on the markets . Dark trading became the poster child of post-Brexit regulatory discussion in the UK and Europe , with the Bloc championing lit transparent trading throughout . The DVCs regime included in the January Mifir text had followed more than six years of deliberation over the desired cap on dark trading in the Bloc , with the European Commission and Parliament finally settling on the deletion of the 4 % and 8 % caps in favour of a single cap of 7 %.
“ In my opinion , the last-minute decision [ in March ] wasn ’ t a surprise as it ’ s been clear from the beginning of Mifid II that politicians and regulators across Europe are committed to the DVC mechanism ,” Evan Canwell , equity trader and market structure analyst at T . Rowe Price , tells The TRADE .
An unintended experiment Without the clarification , ESMA had the opportunity to stop enforcing DVCs until Q4 of next year . Had the last-minute changes to the text not come through , Europe would have found itself taking part in an unintended experiment to test how far dark trading could go if left uncapped .
“ While I think it ’ s unlikely that ESMA had ever planned to stop enforcing the DVC mechanism during this period , it would have been a fascinating opportunity to observe the shift in market dynamics without any artificial constraints on dark trading ,” adds Canwell . “ This would also have allowed market participants and regulators to engage in discussions on both the optimal thresholds and the appropriateness of any future dark caps , in a fully data-driven manner .”
Following reports of the loophole in early March , participants and venues in some cases had begun to put in place contingency plans should dark trading be left uncapped .
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