Imagine you are doing the last of your Christmas shopping – all that’s left to get is a large chunk of your favourite stock. Because you generally buy in bulk, you know to avoid the brightly lit but expensive retail stores, and instead shop at one of the big wholesalers.
But, there’s a problem. Somebody has passed a law capping the amount that any one of those stores can sell to 4% and the total that can be sold by all wholesalers together to 8%. So now you have to closely monitor them all because, if the one you’re headed to is getting close to its limit, you should probably be diverting to another. Naturally, each store owner doesn’t want to fall foul of the rules either and so they decide to voluntarily shut (but just for a few hours) whenever they get near their limit. They also chat regularly between themselves so as to avoid breaching the collective 8% threshold, as then none of them would be allowed to sell to you. This leads to an interesting game of chicken between you and them, as the very places that are most likely to have what you want are probably the ones most in danger of shutting. As you wearily trudge from one store to another you decide to ring ahead and place orders for more than you need at multiple stores, knowing that you can cancel any surplus. Unfortunately, other shoppers have had the same idea and so this simply spooks more stores into shutting early as they worry about breaching their own limits.
I could go on, but you get the point – European dark pool caps are silly and furthermore will only increase the frictional costs for investment managers that buy and sell in bulk on behalf of the man on the street. The Large In Scale (LIS) waiver is so much greater than average lit trade size that many legitimate blocks will still have no home. And, in the (current) absence of a consolidated tape, it’s going to be blooming difficult to calculate all this in real enough time to make good trading decisions.
Whilst it’s sensible that orders that contribute to lit price formation should be transparent, what we have ended up with will only make investment in equities more expensive for everyone.
