Applied since 2007, the Markets in Financial Instruments Directive (MiFID) constituted the EU regulatory basis for practicing investment services and trading financial instruments within the Common market. This legislative instrument has regulated the markets based on the four principles of integration, transparency, efficiency and fairness.
In 2014, the MiFID underwent a revision, resulting in the adoption of two new pieces of legislation, i.e. the Markets in Financial Instruments Directive II (MiFID II) and a homonymous Regulation (MiFIR) - see here.
Whereas MiFIR concerns data reporting standards for traders in regulated markets, MiFID is the instrument that actually regulates the markets by setting out conduct of business rules, organisational provisions, licensing requirements for financial services providers and prerequisites for financial instruments. MiFID II expands the scope of MiFID inter alia by shining light on sectors that escaped the scope of application as foreseen in the initial framework.
One of the previously unregulated markets is that of private institutional trading. Commonly referred to as dark pool liquidities markets, MiFID II imposes information disclosure and transparency requirements for bilateral trading in these dark pools so that investors have a clearer image of who they are trading with. According to Schlaepfer, the purpose of these new rules is to reduce exposure and prevent ‘predatory trading practices’ within these deregulated markets.
He explains the mechanisms through which the new financial instruments trading framework attempts to enhance investor protection in dark pools. First, ‘significant restrictions’ are applied to these trading venues. Second, a much wider variety of Systematic Internaliser (SI) type of investment firms are encompassed in the definition of MiFID II, thus allowing the application of abovementioned stringent rules to a larger proportion of actors across the spectrum, regulated or not.
However, res ipsa loquitur, dark pools are, essentially, dark. They do have benefits in the sense that privately trading securities or stocks can have a positive effect on price. A regulated dark pool, especially in what concerns information disclosure, is no longer a dark pool. Whether the purpose of MiFID II is to indirectly delegitimise dark pools is not clear.
Read here the article: The Dark Pools of MiFID II.