Dark execution strategies under MiFID II: A few shades lighter?

Abstract

While Markets in Financial Instruments Directive II (MiFID II) will introduce a host of transparency and trading reforms in Europe from January 2018, there remains uncertainty as to how existing dark execution strategies, in equities and other asset classes, will be accommodated under the revised framework. Dark execution strategies responding to market participants’ desire to reduce information leakage will not cease to exist when MiFID II rules come into force. How will existing dark multilateral trading facilities (MTFs) and broker crossing networks adapt? Does MiFID II spell the death of dark trading? What is the expected impact on lit and dark liquidity pools? The regulatory response post financial crisis has determined that the market needs to shift towards greater transparency to reduce systemic risk. It is complex to achieve an appropriate balance between the level of regulation and prescriptive rules versus allowing market forces to naturally determine where and how orders are executed. Full transparency is not appropriate for all types of trading, in particular for market actors seeking to exchange large block orders electronically. Appropriate calibration and ensuring a level playing field with a marketplace that is relatively simple to understand and interact with is likely to help investors achieve the best results.