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MiFID II: Double Volume Cap Delay or Game Over?

Rebecca Healey, Liquidnet’s Head of Market Structure & Strategy in EMEA, gives her input into ESMA's decision to delay the closure of broker crossing networks (BCNs) under MiFID II.

The closure of broker crossing networks (BCNs) under MiFID II was due to trigger the next stage in the evolution of dark trading by introducing a threshold of 4 and 8% on dark pool trading.   ESMA have today delayed this until March[1] citing failure by trading venues to provide full and accurate datasets: “Initiating the new regime based on the insufficient data ESMA has received is not appropriate at this stage”.

As frustrating as it is for market participants, the delay makes sense.   ESMA have only received data for approximately 2% of the total number of instruments from 75% of trading venues, as such it is impossible to create a threshold based on the entire 12-month period from January to December 2017 that would be meaningful for the DVC calculations in January 2018.

The reality is that the value the DVC would bring was always questionable given that Systematic Internaliser activity would have been out of scope.

Shifting Dark

We have already witnessed a decline in dark trading during the first week of MiFID II from just an average of 9% of market volumes to closer to 6%.  But the increase in trading on SI as well as the percentage traded Large in Scale (LIS) is also of interest given that neither activity would have contributed to the DVC.  Complete datasets or not, there was always going to be a reduced pool of liquidity that would have been eligible for the DVC.  Recent analysis conducted by Liquidnet showed that as a result of the recent increase in LIS activity, just 51% of stocks capped out on the 12-month look-back[2].  The more participants who trade using the LIS waiver or on an SI, the greater the impact on whether the DVC threshold is triggered or not.

The following article first appeared in The Trade, December 2017 - Evolutionary strategies: How to handle MiFID II DVC threshold rules ……………


MiFID II’s new DVC rules limit a single off-exchange venue to 4 per cent of total trading in an individual stock and dark trading across all venues at 8 per cent of overall volume where the Reference Price and Negotiated Trade Waivers are used. One way to avoid these thresholds being triggered is by trading large in scale, taking advantage of the waiver exempting blocks from the venue caps.

According to Liquidnet’s recent analysis1, just 51% of stocks across the FTSE 100, FTSE 250 and STOXX 600 will be capped out on the 12-month look-back when looking at adjusted trading volumes relative to the implementation of DVC. Moreover, 30% of the capped stocks were within just 1% of the 8% threshold. Further detailed analysis will be required to understand the true impact of the DVC rules, but it appears that market participants have the ability to impact the outcome. Not all instruments, or all markets have the same proportion of dark versus lit trading, but if market participants were to adjust trading behaviours by trading in bigger blocks, there is a possibility that the DVC threshold triggers could be avoided. On average, if below LIS dark activity were to be reduced by 21.17%, all 51% of stocks currently predicted to be capped would in fact fall below the 8% threshold.

One example of this potential is Land Securities, currently predicted to be capped at 8.65%2. Land Securities trades on average 299,000 a day in the dark below LIS, however, if the below-LIS, average dark volumes fell by 40,000 shares to 259,000 shares a day (just 1.1% of ADV), the instrument would fall below the 8% threshold. When viewing a look-back period of just Q3 2017 (containing a higher proportion of traded LIS), the percentage traded below LIS falls to 7.35%.

Transparent objectives

As we can see from the example above, traditional behaviours around trading will need to change in order to avoid triggering the DVC thresholds. Portfolio Managers (PMs) tend to drip-fed their orders down to the dealing desk, rather than being completely transparent about the full size of their trading intentions. However, if the dealing desk is made aware not only they are able to benefit fully from the LIS waiver, they can also ensure their trading activity does not inadvertently contribute to the DVC threshold being triggered. This continual progression towards improved communication between Portfolio Managers and their dealing desks also ensures optimal execution outcomes.  A recent Liquidnet Best Execution Report3 showed that 85% of those surveyed admitted there was more they could be doing internally to improve performance.

To successfully navigate the shifting liquidity landscape as a result of the introduction of unbundling, a comprehensive analytical review of evolving execution options throughout the lifetime of the order will be needed. In particular, buy-side firms will need to focus on adverse venue selection or improving unnecessary opportunity cost lost through adjustments to workflows, rather than simply expecting their broker to enhance execution performance. New skill-sets will be required, supported by tools and technologies that can help achieve optimum results, either by notifying when trading is above the LIS threshold to benefit from the LIS waiver, or uncovering improved sources of liquidity outside of traditional execution partners. To achieve this successfully firms will need to focus on their consumption of accurate pre-trade analytics data to ensure optimal selection, rather than focusing on a  “look back and check” to verify a trading outcome.

Data is king

Post-January 2018 there will be no guarantee of what the liquidity landscape will look like once it has shifted towards a new, truly unbundled environment. We do, however, expect to see an increased use of  more accurate and complete datasets with enhanced analytics that will provide the necessary additional layers of intelligence to continually enhance and evolve execution processes.

As information becomes more prevalent, traditional silos around asset class execution will begin to break down, and control of order execution will switch from the sell-side to the buy-side. The firms that independently focus on aligning similarities of policy, process, and performance - at multiple levels throughout their organisation - will be the winners of this stage in execution evolution.


1 Shape Shifting, Accessing the Dark Post MiFID II, October 2017
2 Shape Shifting, Accessing the Dark Post MiFID II, October 2017
3 Re-Engineering Best Execution, June 2017

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