LIQUIDITY LANDSCAPE IN EUROPE POST MIFID II.
Big xyt shares independent insights on European trading derived from a consolidated view on cash equity markets.
The measures covered below are used as a reference by exchanges and brokers, as well as buyside firms reflecting answers to relevant questions being posed in the post MiFID II era. The methodology is fully transparent and applied to tick data captured from all major venues and APAs.
The trading community has seen the landscape evolve throughout 2018 as the impact of regulatory change continues to take effect. Many observers have been surprised that some behaviours have grown but not at the rate expected. These include volumes reported by Systematic Internalisers (SIs) and Periodic Auctions, despite several venues introducing the functionality.
Conversely, closing auction volume has continued to be the area of greatest share growth – this may be linked to specific index events but appears to be a growing trend nonetheless.
There has been some frustration amongst the community that opacity remains as a result of lack of granularity of certain order types. Trades reported OTC and Off Exchange would benefit from additional flags to differentiate between addressable and non-addressable volume.
The following analysis aims to provide some evidence for these observations and possibly pinpoint areas to watch for future developments.
Double volume caps and dark pools
With the implementation of DVC (Double Volume Caps) in March 2018, the total volumes traded in dark pools dropped by approximately 50% (from 4bn EUR to 2bn EUR) while LIS trades (Large-In-Scale) have seen further growth (to more than 50% of traded value on dark pools). This trend has remained stable during Q2 and Q3.
Dark pools – breakdown by region
With additional stocks being suspended from dark trading during Q3, the trends observed during the first half of 2018 strengthened or accelerated in the various regions. Scandinavian stocks traded close to 100% as LIS, e.g. DK25 stocks traded with 94% as LIS on dark pools. Major markets were also affected by this trend, e.g. LIS volumes for UK100 members increased by another 5% from 79% in Q2 to 84% in Q3.
Even though LIS trading compensated for some of the suspended sub-LIS flow, the market share of dark pools grew only slightly to approximately 6% in Q3 from 5.3% in Q2
The data shows an increase of auction volumes from 16.3% to 20.5%. This increase is related to the Optiq release that now delivers reliable auction volumes for Euronext. Excluding this technical impact of the Optiq release, the market share of auctions and of lit trading (CLOB) at RM/MTFs remained stable between Q2 and Q3.
Periodic Auctions remained strong in Q3 2018 with an average daily value traded (ADVT) of approximately 1bn EUR. Several venues have launched new auction mechanisms and it will be interesting to see the impact on total volumes and on market share in the coming months.
The breakdown of market share in dark pools and in periodic auction volumes by regions demonstrates that with the implementation of DVCs the restricted dark flow has partially moved to periodic auctions. Regions with the largest decrease in dark trading have seen strong growth (market share) for periodic auctions, e.g. the market share of periodic auctions for the UK100 continued to grow from 3.48% in Q2 to 4.05% in Q3.
In Q3 traded volumes remained stable for SIs based on ADVT. The adjusted numbers are calculated by excluding several condition codes (e.g. Non Price Forming Trade or Give-Up/Give-In Trade) reducing the SI volumes by approximately 50%. The real price-forming value is expected to be even lower and will become clear as more granular reporting flags are introduced.
Market share by venue
Comparing traded volumes in the major indices on the largest European venues, Q3 shows a continued trend since MiFID II where MTFs (lit, dark, periodic auctions) are gaining market share from the primary exchanges.
Footnote: When referring to dark trading in this study, we refer to trades taking place on MTFs above Large In Scale (LIS), on Systematic Internalisers, on periodic auctions, all of which avoid the need for pre trade transparency.
For the purposes of this study, off-exchange and off-book activity has been excluded as deemed to be inaccessible volume to market participants.