EU mistake opens 18-month window for unlimited dark trading

7 March, 2024 by Nikou Asgari in London

Brussels is rushing to close a loophole in its new share trading rules after unintentionally leaving an 18-month window for investors to buy and sell unlimited amounts of stock in private trading venues.

Policymakers are seeking to update the new legislation, intended to more accurately reflect share trading activity in the EU after Brexit, after the oversight was discovered, according to people familiar with the matter.

The misdrafting of the rules potentially allows unlimited trading in business that the EU has sought to limit for the past decade.

Dark pools are a private type of trading where investors can buy and sell blocks of shares without their exposures being visible and without disturbing the market. Users complained that the rules were too restrictive and that most business took place in London-based trading venues.

The changes to so-called dark trading are part of a package of measures designed to boost the competitiveness of the EU’s capital markets, which are suffering from falling trading volumes and a lack of stock market listings.

Under new, simpler rules, Brussels is introducing a cap of 7 per cent on the amount of share trading in one EU-listed company in a dark pool. That will replace a more complex system that had two caps. The EU’s new standards, an update of the Mifir legislation, do not include the old rules that contain the so-called double volume cap, the people said. The rules are expected to be finalised in April and come into force in late 2025, leaving that 18-month window open for unlimited dark trading.

The European Securities and Markets Authority, the pan-European regulator, confirmed to the Financial Times that the 18-month open window existed under the new rules, which have been published in the EU’s official journal that covers all new legislation.

It added that it was “aware that there is a need for providing further guidance on the changes introduced by the Mifir review and on when they’ll take effect”.

The regulator said it was aiming “to provide further clarity” ahead of the rules coming into force in late April. If no changes are made by then, investors will be able to trade unlimited volumes in dark pools for a year and a half.

Investors typically like dark pools because they can move large blocks of shares without disturbing the market and without their deals being visible as they would be on so-called lit exchanges.

A person familiar with the matter said the EU’s rules have “been written erroneously”, adding that “the way that they’ve written it, maybe by mistake, maybe by design, deletes the old caps, meaning there will be unlimited dark trading for 18 months in the EU”.

The European Commission did not respond to a request for comment.

Dark trading typically takes place away from exchanges, at venues run by big banks such as Goldman Sachs, which would likely benefit from a rise in trading volumes if the EU’s current rules are left unchanged. Stock exchanges typically dislike dark trading because, they say, it provides less transparency to the market.

After the UK voted to leave the EU, it eased its rules on dark trading in an effort to lure business back to London.