The big picture:
MiFID II introduces an additional venue on top of regulated markets,
multilateral trading facilities (MTFs) and systematic internalisers (SIs).
The organised trading facility (OTF) is described as a multilateral system,
which is not a regulated market or MTF, utilised for bonds, structured
finance products or derivatives. Alongside this there are changes to dark
trading with the introduction of double volume-caps on certain trades.
The restrictions will see the double volume-caps triggering bans on certain types of dark trading when a transaction accounts for 4% of the total
activity on a single dark venue, or 8% of total trading market-wide.
Furthermore trades breaching the 4% venue-specific cap will be subject
to a 6-month ban on the venue in question, while issues exceeding the 8%
market-wide cap trigger a 6-month dark trading ban across Europe.
The big change:
Market participants have not been shy of saying MiFID II’s rules on dark
pools will hinder trading when they come into force on 3 January 2018.
They were drawn up to enhance transparency, but some say this quest for
transparency has resulted in regulators losing sight of the end investor.
Various studies have indicated a severe amount of stocks will hit the
trading threshold and trigger bans, something regulators may not have
intended. This means dark trading - once considered an appealing alternative for buy-siders looking to minimise market impact - will be turned
on its head come January 2018.
The big struggle:
Although not a new concept, the systematic internaliser regime has
proved to be one of the most difficult things for firms to navigate under
MiFID II. With rumours of sell-side firms plotting to network SIs in a bid
to operate broker-crossing networks in disguise, authorities in Europe
moved quickly to close any potential loophole.
But the regime itself will bring about consequences that are largely
unintended by regulators. It has been predicted up to 100 SIs could be
operation come January 2018, with banks operating numerous for various
asset classes. This will lead to increased market fragmentation of liquidity, while institutions are forced to somehow interact with all of them.