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EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/2.V
2.V Dark liquidity and dark pools
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS267278:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
CEPS, MiFID 2.0: Casting new light on Europe’s Capital Markets, 2011, p. 32.
CEPS, MiFID 2.0: Casting new light on Europe’s Capital Markets, 2011, p. 32.
Commission, Impact Assessment Accompanying the document Proposal for a Directive of the European Parliament and of the Council on Markets in financial instruments [Recast] and the Proposal for a Regulation of the European Parliament and of the Council on Markets in financial instruments, 20 October 2011(COM(2011) 656 final), p. 11.
Another – and broader – interpretation of the Commission is that dark pools are ‘trading systems where there is no pre-trade transparency of orders in the system (i.e. there is no display of prices or volumes of orders in the system). Dark pools can be split into two systems: systems such as crossing networks that cross orders and are not subject to pre-trade transparency requirements, and trading venues such as regulated markets and MTFs that use waivers from pre-trade transparency not to display orders’ (Commission, Glossary of useful terms linked to the market for financial instruments, 2011, p. 5). For a somewhat similar broad interpretation of dark pools, reference is made to P. Gomber and I. Gvozdevskiy, ‘Dark Trading under MiFID II’, in D. Busch and G. Ferrarini (Eds), Regulation of the EU Financial Markets: MiFID II & MiFIR, Oxford University Press, 2017.
CEPS, MiFID 2.0: Casting new light on Europe’s Capital Markets, 2011, p. 40 and ECB, Occasional Paper Series: Dark pools in European equity markets: emergence, competition and implications, July 2017(No 193), p. 4.
Reference is made to CEPS, MiFID 2.0: Casting new light on Europe’s Capital Markets, 2011, p. 40 and p. 53. See also P. Gomber and I. Gvozdevskiy, ‘Dark Trading under MiFID II’, in D. Busch and G. Ferrarini (Eds), Regulation of the EU Financial Markets: MiFID II & MiFIR, Oxford University Press, 2017.
CEPS, MiFID 2.0: Casting new light on Europe’s Capital Markets, 2011, p. 40 and p. 53.
CEPS, MiFID 2.0: Casting new light on Europe’s Capital Markets, 2011, p. 32.
The situation where pre-trade information is not public is referred to as dark liquidity.1 The lack of pre-trade transparency can either be the result of: (i) legal exceptions to mandatory pre-trade data publication (e.g. waivers under MiFID I/MiFID II); or (ii) the non-applicability of pre-trade transparency rules (e.g. so-called broker crossing networks under MiFID I).2
A sub-category of dark liquidity is the so-called ‘dark pool’ (also: black pool). There is no official EU-definition of a ‘dark pool’. One interpretation of the European Commission is that dark pools are ‘platforms operated by an RM or an MTF and benefitting from pre-trade transparency waivers’.3 While other definitions are possible too,4 this research uses the former definition of the Commission. Accordingly, a dark pool is considered to be (1) a venue or mechanism operated by an RM or MTF that (2) uses a MiFID I/MiFID II pre-trade transparency waiver (i.e. pre-trade information is not made public due to the waiver). The MiFID I and MiFID II RM/MTF equity pre-trade transparency waivers (dark pools) will be examined in chapters 4 and 5.
Dark liquidity, including dark pools, may sound mysterious and negative. Thankfully, the reality is quite different. It is well-accepted in EU regulation – and economics – that dark liquidity is an important element in supporting the adequate functioning of financial markets. This is because publishing pre-trade data can expose investors to unforeseen costs. Consider, for example, a pension fund that wants to buy a large number of shares (a so-called ‘block trade’). Revealing the trading interest could anticipate other investors to buy the shares before the pension fund is able to do so (so-called predatory trading).5 Here, the pension fund (and ultimately the end-users of the pension fund) would pay more for the execution compared to the situation where the order would be executed ‘in the dark’.6 Other non-limitative examples of benefits of dark liquidity include negotiating a better deal, obtaining so-called price improvements, and reducing information leakage.7 Nonetheless, there are risks involved with dark liquidity. Too much dark liquidity can harm a financial market. Examples include a harmed price discovery process, reduced investor confidence, and a damaged level playing field (e.g. a less pre-trade transparent venue ‘free-rides’ on the pre-trade data as published by a functionally similar venue).8