EU regulator rolls out trading caps for bulk of stock market

By Huw Jones

LONDON, March 7 (Reuters) - The European Union's securities watchdog said curbs on trading shares in the "dark" or off public exchanges across the European Union will be rolled out on March 12 and cover the bulk of blue-chip stocks such as HSBC and Unilever (NYSE: UL - news) .

The European Securities and Markets Authority (ESMA)published data on Wednesday showing which stocks will be subject to limits on trading in "dark pools".

Trading will end up on stock exchanges such as London Stock Exchange, Deutsche Boerse (IOB: 0H3T.IL - news) or other platforms traded in the same way as bourses.

The data published by ESMA shows the cap will cover over 80 percent of the most heavily traded shares, meaning household named blue chips such as Nestle (Swiss: NESN.VX - news) , British Tobacco, HSBC and Unilever.

The aim is to increase transparency in share trading and stop some investors having an unfair advantage over others. The caps, part of new EU securities rules known as MiFID II introduced in January, were delayed due to insufficient data.

The so-called "double volume" caps will require dark pools to suspend trading in stocks for which, on average, more than 8 percent of daily trading was transacted in the dark over the past 12 months.

ESMA said a cap will apply for six months to 17 instruments whose trading on a single platform in January 2018, and 10 instruments whose trading last month, went beyond 4 percent.

A further 727 instruments passed the 8 percent mark in January when trading across all platforms in the EU is totted up, and 633 in February 2018, ESMA said.

Brokers and other market participants have spent months preparing algorithms and trading systems for the introduction of dark pool caps.

Alasdair Haynes, chief executive of Aquis Exchange, said ESMA's statement gives markets clarity and ends rumours that the caps would be delayed indefinitely.

"This makes it very clear what the intent of the regulators are to create greater transparency, a shift away from dark to more lit venues," Haynes said.

Dark venues were originally conceived for banks or asset managers to trade large orders without the glare of transparency, which can adversely move prices before such an order is fully executed because of the time it takes.

But over time much smaller orders were ending up on dark pools, raising concerns among regulators.

"As dark volume caps will be implemented from March, we expect market shares at dark venues will decline by about 350 basis points, with most of the gains accruing to the regulated exchanges," UBS (LSE: 0QNR.L - news) exchanges analyst Michael Werner said in a note to clients.

Dark trading rose to 9.5 percent of volume on the 12 biggest stock markets in Europe in October 2017, falling back to 8.2 percent last month, UBS said.

"People want it to be a revolution but it won't be, as people will have to assess the benefits and see how they can trade more efficiently," Haynes said.

(Reporting by Huw Jones, editing by David Evans)