Plato Partnership, the not-for-profit industry company, has published its first piece of academic research through its Market Innovator (MI³), the body created to facilitate independent market structure research in partnership with leading academics around the world. It will produce research that will promote efficient markets and appropriate market structures for the benefit of all market participants.

The paper, ‘Shedding light on dark trading in Europe’, authored by Professor Carole Comerton-Forde, Professor of Finance at the University of Melbourne, examines how firms need to adjust to new restrictions on dark trading and the closure of Broker Crossing Networks that will come about following implementation of MiFID II in January 2018.

In this launch piece of research, Professor Comerton-Forde concludes that buy-side firms need to start changing their trading behaviour now in order to ensure a smooth implementation of MiFID II. She states that while the industry will be able to weather several of the changes easily, certain points, such as double volume caps being assessed by the European Securities and Markets Authority (ESMA), are likely to have more dramatic effects, with possible suspensions prohibiting dark pool trading at venues if trading volume caps exceed accepted limits.

The paper makes four main recommendations:

• Buy-side firms will need to assess 2017 trading levels to determine whether volume caps will be reached, triggering possible trading suspensions;
• Buy-side firms will need to collaborate with the sell-side on adjusting operating practices when dark trading is shut down in certain stocks;
• Firms will need to carefully evaluate the merits of new trading venues; and
• Buy-side firms should look to effectively capitalise on new data provided by MiFID II compliance to assist with their evaluation of trading outcomes.

Professor Carole Comerton-Forde, Professor of Finance at the University of Melbourne and author of this paper,commented:

“The objectives of a buy-side trader are simple: to source sufficient liquidity whilst minimising information leakage and price impact. Meeting these objectives has undoubtedly become more challenging in the post-MiFID II world, and the dark trading rules that form part of MiFID II are by far the most restrictive compared to those in the United States, Canada and Australia.

“It is vital that traders are properly able to navigate the costs and benefits of the different types of venues that are available to them, but this will require buy-side firms to invest in more sophisticated analytics tools to enable them to demonstrate execution quality and develop forward looking tools to enhance execution outcomes.

“Careful attention should be paid by the buy-side to trading behaviour in the year leading up to implementation in January 2018 in order to determine whether or not these caps will be reached, as well as expanding their scope to evaluate the merits of new venues and order types to make sure they don’t get caught out further down the line.”

Commenting on the launch of MI³, Darragh Rossi, Plato Partnership MI³ Lead, commented:

“This paper marks the first output from MI³ and represents a realisation of our vision to provide a mechanism whereby all market participants can collectively address regulatory imperatives in tandem with the leading academic minds, such as Carole. There is not a firm in the marketplace today that is not going to find this paper an important food for thought as we move towards MiFID II next year. We are delighted to have launched our first piece of independent research and are looking forward to addressing a wide-range of other issues facing the equity trading marketplace over the coming months and years.”

Nej D’jelal, Plato Partnership Co-Chair, commented:

“At the very beginning of the Plato vision we recognized a unique opportunity for the industry to give back to market participants and end investors through accessible and independent academic research.  Today that vision has been realized through Plato’s not-for-profit ethos which has enabled the funding of this research.  We look forward to future MI3 initiatives and as part of this remain focused to continue to bring together academics and practitioners.”

Mike Bellaro, Plato Partnership Co-Chair, commented:

“The challenges facing the buy-side as we approach MiFID II are significant and front of mind. This paper is a positive contribution to the dialogue taking place in the marketplace and comes at a timely moment for the sector, with just over six months until implementation. I am delighted that MI³ has launched with such a topical and thoughtful paper, and look forward to the future contribution of Plato Partnership research in driving positive discussions about improving market structure and the equity trading landscape for the ultimate benefit of end investors.”

The launch of this paper coincides with the inaugural Plato Partnership MI³ academic conference, Evolving Market Structure in Europe and Beyond, which will be held at Sadler’s Hall, London, on Thursday 29 June, with senior academics attending.