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Those most vocal against the use of dark caps during the European regulatory discussions came from the buy- and sell-side , with many suggesting the new single cap of 7 % was arbitrary and querying how the watchdog had reached this conclusion . Many were therefore keeping close tabs on the saga in March , watching the events unfold in the hope that what they considered an unnecessarily complex detail might not come to fruition . “ There was a genuine hope that there could be an opportunity for those caps to be repealed . I suppose intuitively you would expect a certain level of disappointment on a number of levels ,” says James Baugh , head of European market structure at Cowen . “ One is that we found ourselves in this position , but also perhaps that there wasn ' t a willingness to use it as an opportunity , to provide that chance to see what would happen without the caps in place . “ If this was a mistake in the drafting , it would clearly take some courage to roll the dice to see what would happen if the caps were lifted for that interim period .”
The reality is that other regions where dark trading has been left uncapped have not seen the segment grow out of control . In fact , the US , which doesn ’ t enforce caps , and the UK , which ditched caps post-Brexit , have both seen dark trading reach a certain level and then plateau . In the UK , dark trading has peaked at around 13 % of monthly traded volumes on exchange since removing its caps . Meanwhile in Europe , stocks are rarely close to the DVC thresholds .
“ When we look at the double volume cap regime , it ' s not like we ' re seeing those European markets buffer at those levels ,” adds Baugh . “ It ' s not like dark trading has got to those levels and therefore , it ' s constrained at those levels . That ' s not the case at all . If anything , the data would show you that it ' s trading a couple of percentage points below those current levels .”
The market has evolved towards other forms of execution in light of the caps on dark trading , meaning a significant shift to dark venues is more than unlikely .
“ There are a large number of wellestablished alternative venues ( such as periodic auctions ) which allow for trading in a ‘ dark-like ’ manner and have been firmly embedded in routing logic across Europe ,” adds Canwell .
Why is it then that we have seen two major primary exchanges move to launch dark books in the last few months when it was those exchanges that were most against removing caps on dark trading during Mifid
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