Most asset managers view the current shift towards trading stocks in large blocks positively, but they are concerned that other consequences of changes to EU market rules are hurting transparency, a survey by Liquidnet found on Thursday. Having adjusted to the EU's Markets in Financial Instruments Directive II, buy-side traders told the trading platform that more scrutiny of periodic auctions - a practice that has gained popularity since MiFID II took effect in January - was needed.
MiFID II aims to push more trading onto regulated public exchanges where prices and participants are visible to all. Many in the market see periodic auctions - which take place on exchanges and are post- but not pre-trade transparent - as a halfway house between dark-pool and fully transparent "lit" trading.
"If the regulators' objective was to move liquidity back onto lit primary exchanges, it is questionable to what extent this has been achieved," said the authors of the report, based on interviews with 58 asset management firms in Europe and beyond. Curbs on trading in dark pools under a certain order size, called double volume caps (DVCs), were rolled out on March 12
to cover the majority of blue-chip stocks. Those caps have led to an increase in large-block trading in dark pools, which 88 percent of respondents viewed positively. Some investors had been concerned that DVCs would hurt performance by restricting trading options, but just 19 percent of those interviewed now held that opinion.
Over 1 billion euros a week is now traded in periodic auctions, in which traders' intentions and bid prices are matched with no pre-trade transparency. Since the first round of DVCs was introduced, 30.6 billion euros of such trades has been in capped stocks versus 13.7 billion in non-capped ones, Liquidnet said.
Almost 70 percent of investors interviewed considered periodic auctions to be useful, but half also said they need tighter regulation. Just 12 percent believed MiFID II had increased the level of volume transparency in periodic auctions. Periodic auctions are in theory "lit", transparent, trades, but in practice have been criticised by regulators including France's AMF.
"The move to lit markets was intended to create more transparency around the price formation process, including pre-trade transparency," said Rebecca Healey, head of EMEA Market Structure at Liquidnet. But with investors continuing to look for an alternative to dark pool trading, activity in systematic internalisers - dealing platforms run by banks and other market participants, which reveal much less information about impending transactions - has also increased.
Asked whether the level of price transparency in systematic internalisers had increased after MiFID II, 40 percent replied that it hadn't, while 38 percent said it was to early to tell. Nearly half of respondents were also concerned that the SI system would lead to "cherry-picking" of buy-side flow.
The report highlighted disparities in the efficiency of different SIs in executing trades. "Ensuring greater transparency in the SI regime will regulate the SI regime through better natural selection," the report argued.
The report recommended exchanges incentivise trading through mechanisms such as a mid-point match, predicting that scrutiny of the consequences of MiFID II would continue for some time, likely culminating in another sea change in investor behaviour. "There was an acknowledgement in the report that the status quo is unlikely to continue as it is," said Liquidnet's Healey. "2018 is not the finish line of MiFID 2."
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