UPDATE 1-EU reaches outline deal to cap "dark pool" share trading

Thu Nov 21, 2013 10:42am EST

* EU lawmaker Ferber expects final MiFID deal by Xmas

By Huw Jones

LONDON Nov 21 (Reuters) - The European Union reached an outline deal on Thursday to try to shine a light on shadowy areas of the financial markets by capping off-exchange share trading, known as "dark pools", a senior EU lawmaker said on Thursday.

The outline agreement is likely to hit the City of London financial centre, which is home to several "dark pools" or anonymous trading platforms. But stock exchanges and big banks will likely benefit.

The deal has prompted concern among investors because of its potential restrictions on where they can trade.

The outline deal is part of EU efforts to finalise an update of securities trading rules, known as Markets in Financial Instruments Directive or MiFID, to reflect lessons from the 2007-09 financial crisis and rapid advances in trading technology.

Markus Ferber, the German centre-right lawmaker who is leading the negotiations for the European Parliament, said Thursday's outline deal would form the basis for further negotiations on how to make it work in practice.

"There are still some questions open. The whole system has to be made functional," Ferber told Reuters.

"My planning is to have a deal before Christmas," Ferber said, referring to the MiFID reform as a whole.

The main advantage to dark pools is that investors do not have to make their orders public. This helps to prevent other market participants knowing who is behind a large trading position and make it possible to bet against it.

Under the outline plan, trading in a stock anonymously will be capped at 8 percent of the total amount traded of that stock in the EU, meaning that most of the trading would have to be on exchanges or similarly "lit" as opposed to "dark" trading platforms.

So-called dark pool trading in a stock on an individual platform would be restricted to no more than 4 percent of the total EU market for that stock.

TABB Group, a consultancy, has estimated dark pool share trading is equivalent to 11 percent of the European stock market, meaning the caps as proposed would end some anonymous trading.

The EU's executive European Commission will conduct further work on how the caps would work in practice, such as what happens when a cap is breached, and how often the data on dark pool trading is published.

Ferber said he would be concerned if checks on whether the caps are busted were only done on the basis of monthly data, a period seen as too long.

The European Securities and Markets Authority would collate data on share trading gathered by national authorities.

Britain's Investment Management Association said the caps would ultimately hit end investors and pension funds as it poses a restriction on the industry's ability to get the best price for their clients.

"It would be far better to address and rectify any concerns with regards to the practice of 'dark trading' if the industry and regulators can work together to come up with positive solutions," IMA markets expert Arjun Singh-Muchelle said.

The TABB Group said regulators seemed determined to restrict the ability of investment funds to deliver the best deal for their customers.

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