There are broadly two schools of thought about the likely impact on 'dark pool trading' of the EU's MiFID II (markets in financial instruments directive II). At one extreme there are those who say dark pool trading will be impossible once MiFID II takes effect on 3 January 2018.
At the other extreme, there is a feeling that official exemptions and the turning of blind eyes by market players and regulators mean nothing will change. Life in the dark pool trading universe will continue pretty much as normal.
A dark pool is a trading venue where information about orders for assets being traded is not displayed before execution. Dark pools have less transparency than 'lit' exchanges. The latter display aggregated volumes of current orders to buy or sell at different prices.
There is a vast amount of grey in the areas between the black and white extremes in dark pool trading and opinion abounds.
"I have a feeling that some very clever technical people are making a lot of money out of dark pool trading as here is a lot of dumb money in the financial markets," says self-styled ultra-digital futurologist Rohit Talwar, suddenly sounding very traditional and analogue.
"I am not sure that dark pool trading benefits the economy and society on a wider basis," he continues. "Dark pools are not a useful tool for trade and transparency. They are the very antithesis of what open markets are meant to be.
Rohit Talwar is, then, very much in the camp that believes MiFID II is irreconcilable with the survival of dark pool trading. As is Silvano Stagni, managing director at Perpetual Motion Consulting and Research who features further below.
But both men are realistic enough to paint a different scenario. "Fundamentally, the minute you lay down rules in the financial services industry, people look for ways to get round them," observes Rohit Talwar, not the first and certainly not the last to make this point.
"It is not a gentleman's club. There is no thought of customer benefit or ethics. The industry will find a way around the regulation." He invokes the law of unintended consequences.
A rule intended to render something simpler and cheaper will make it more complex and expensive. "The industry will bend the rules to transfer risk," he says. "We will see Wild West behaviour which will make the last crash look like a meeting of Sunday school supervisors.
If this bleak view of the financial services industry is accurate, dark pools, it seems, will, if anything, become darker rather than lighter. The chances of small investors benefitting in any way seem more and more remote.
Silvano Stagni has sketched out details of how the industry will shapeshift in response to MiFID II. New trading venues, changes to the definition of best execution and an obligation to trade liquid instruments on exchange will bring about fundamental changes.
Those who operate a trading platform where clients can trade non-equity instruments will have the choice to register as an Organised Trading Facility (OTF) or to execute those trades through third parties.
Those who run a proprietary trading portfolio will have to register as systematic internalisers (SI). An SI is a financial institution that runs a trading platform where their clients can trade one specific instrument with them.
An SI has to provide a buy and sell quote for the instrument in which it has a licence to be an SI but it is not obliged to maintain a stable and liquid market in that instrument as a market-maker does.
More often than not an SI owns (or borrows) the liquidity in that instrument. Although it is not a synonym of 'proprietary trading' it amounts to the same thing.
One of the most 'disruptive' changes is the definition of best execution. In MiFID I it was "the best outcome for the client". MiFID II extends the concept to include price, total transaction cost and transaction speed.
Transaction speed is defined as the time elapsed between receipt of the order by an execution venue and actual execution of the order. The likelihood of a transaction taking place within the parameter of the order is also to be taken into account.
The new rules on best execution include an execution quality report. Orders need to be grouped by financial instrument, execution venue and order type. Anything that influenced the financial institution to execute the order in a specific venue should be included.
This refers, for example, but is not limited to, to inducements, the involvement of common shareholder(s), parent company-subsidiary relations and general discounts.
One element that Stagni says he finds difficult to predict is the impact of the changes to 'non-transparent' trading. Dark pools will have to operate within a set of exemptions from the transparency rules. These are mainly 'large trades' and 'negotiated trades'.
The latter are not only subject to the double volume cap of 4% of the volume of trades on a single trading venue and 8% of the volume of trades across all the EU trading venues. The volume is calculated as the rolling total of the past 12 months.
So what is the future for dark pools?
Silvano Stagni is firm in his belief that a dark pool scenario where the transaction does not affect the quote of the shares and the trade is not reported anywhere will not be possible as we know it now.
A risk is that the disappearance of dark trades for liquid instruments may have an effect on the volatility of an asset's price and that will undoubtedly affect small investors, he adds.
The European Central Bank addressed the subject at length in one of its occasional paper series. Authored by Monica Petrescu of the ECB and the University of Cambridge and Michael Wedow of the ECB, it was published in July this year.
Dark pools are likely to continue to be important players in financial markets when MiFID II comes into force in Europe in 2018, they predict.
The market share of dark pools has stabilised in recent years around the level of the 8% volume cap, they note, so it is unlikely that the new MIFID II restrictions will dramatically reduce their aggregate market presence.
However, the impact on trading in some instruments where dark pools are more often used – particularly stocks listed in London – may be more substantial given that the level of trading is more likely to exceed the volume cap.
The effect of this regulation will likely be different across dark pools, they say. Venues focussing on large orders may be able to continue offering dark trading to clients through large-in-scale waivers even if the cap limit is hit.
Discussion of dark pools and their role in modern financial markets could go on forever. It probably will, until humankind vanishes into cosmic history, not with a bang but with a whimper. For every opinion voiced, it seems, there is an equal and opposite opinion.