MiFID II: ESMA publishes double volume cap data ahead of dark pool trading ban

The European Securities and Markets Authority (ESMA) has published  trading volumes and calculations regarding the double volume cap (DVC) under the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).

The purpose of the DVC mechanism is to limit the amount of trading under certain equity waivers to ensure the use of such waivers does not harm price formation for equity instruments. More specifically, the DVC limits the amount of dark trading under the reference price waiver and the negotiated transaction waiver.

In January 2018, ESMA delayed the implementation of the DVC, due to data quality and completeness issues, until March. ESMA since has worked with National Competent Authorities (NCAs) and EU trading venues to solve these issues.

ESMA is today publishing the DVC calculations for January 2018 (totalling 18,644 instruments) and February 2018 (totalling 14,158 instruments). Based on this data, two caps will limit dark trading in equity and equity-like instruments, namely for:

1. 17 instruments for January 2018 and 10 instruments for February 2018 for which their percentage of trading on a single trading venue under the waivers goes beyond 4% of the total volume of trading in those financial instruments across all EU trading venues over the previous twelve months; and

2. 727 instruments for January 2018 and 633 instruments for February 2018 for which their percentage of trading across all trading venues under the waivers goes beyond 8% of the total volume of trading in that financial instrument across all EU trading venues over the previous twelve months.

NCAs should suspend, within two working days, the use of waivers in those financial instruments where the caps were exceeded. Hence, the use of the waivers should be suspended for these instruments for a period of six months starting from Monday, 12 March 2018.

ESMA is intending to publish the applicable DVC data for March 2018 on 9 April 2018, including any data received after the cut-off date for data submissions of 1 March 2018.

Responding to ESMA’s statement, Nick Bayley,  Managing Director within Duff & Phelps’ Compliance & Regulatory Consulting Practice, and formerly the head of the FCA’s MIFID II policy unit said:

“ESMA is still operating based on incomplete data. It’s admittedly a far better dataset than before – but with 83% of liquid shares reported, it’s not perfect. The expectation from some quarters was that ESMA might continue to hold back and wait until it had a complete picture of dark trading volumes. However, it has pushed ahead and implemented the double volume caps (DVC) – which shows a certain resolve.”

 “It will be interesting to see the effect of the caps, which are designed to protect price formation in the ‘lit’ markets, when they bite next week and to see where the dark liquidity moves to.  Several trading venues have developed new intra-day auction mechanisms, which provide a level of pre-trade transparency and thereby effectively act as lit markets.  I expect the volumes on some of these venues could jump next week.”