Dark trading limits to apply from March after reporting failures

Dan Barnes

*Update* The European Securities and Markets Authority (ESMA) will only apply the double volume cap (DVC) mechanism for trading European equities from March 2018, and will delay the publication of DVC data to that month. The regulatory body reports that the “current quality and completeness of the data does not allow for a sufficiently meaningful and comprehensive publication of double volume cap calculations, as required under MiFID II/MiFIR”.

Initially it had said that it intended to publish the data covering the previous periods in order to ensure the full application of the DVC as of January 2018, however The DESK has confirmed the full DVC will not be applied retroactively.

While ESMA expected to receive data for around 30,000 instruments in the context of the DVC mechanism, on the basis of the data collected for the transitional transparency calculations for equity and equity-like instruments. ESMA has received files from 75% of trading venues. However, this resulted, in most cases, in only partial delivery of the information needed i.e. data delivered by only some, but not all, venues trading an instrument, or data not covering the entire 12-month period from January to December 2017 that is relevant for the DVC calculations in January 2018.

The regulator says that it has taken this decision to avoid creating an unlevel playing field. Since 3 January, ESMA has been performing an analysis of the quality and completeness of the data received from trading venues to perform DVC calculations.

Based on the analysis performed, ESMA says it has realised that the publication would have resulted in a “biased picture covering only a very limited number of instruments and markets.”

ESMA says it is aware of the legal obligation to apply the DVC from January 2018. However, as the publication of the calculations triggers other legal obligations in terms of transparency waivers’ suspensions related to dark trading, initiating the new regime based on the insufficient data ESMA has received is not appropriate at this stage
It expects that the actions initiated to bridge this information gap, involving working with national competent authorities (NCAs) and trading venues to address data quality and submission issues, will allow for publication in March.

Data completeness is required to undertake the DVC calculations. In this respect, ESMA only received complete data for approximately 650 instruments, i.e. around 2% of the expected total. Additionally, the set of 650 instruments for which complete data is available only encompasses relatively illiquid instruments, which have a limited amount of dark trading. This fact would have rendered a publication at this point in time largely inconsequential.

The DVC IT system is more complex compared to the other MiFID II IT systems that ESMA is running. Moreover, ESMA acknowledges that trading venues only had limited time to compute and submit all data as the relevant reporting period only closed on 31 December 2017 and the data had to reach ESMA by close of business on 5 January 2018.

ESMA believes that the initial technical and reporting problems leading to this delay can be overcome within the next few weeks. To achieve this, ESMA and the NCAs are depending, and relying, on good cooperation from trading venues to be able to operate the DVC mechanism as envisaged by the co-legislators.