It wouldn’t be the investment banking industry if large investment banks weren’t constantly thinking of new schemes to skirt regulation for monetary benefit. Which is why it should come as no surprise to anyone that Goldman Sachs has already created, and is likely working on fine-tuning, a method for skirting dark pool trading rules that have been established in Europe.
That’s right, folks. Forget about “dark pools“ and say hello to “stock auctions”. What is the point of “stock auctions”? Basically to be able to place dark pool trades – where orders are kept “off the market” and quiet, almost the exact same way dark pool trades happen. But by giving these transactions a new name, Goldman Sachs thinks it has found a “work around” for MiFID II rules. Bloomberg reported on the emergence of these new auctions this morning, stating:
Goldman Sachs Group Inc. is taking on the exchanges to win the business of fund managers eager to keep their stock trades hidden in the era of MiFID II price transparency.
The bank has set up a so-called periodic auction service that matched its first trades on March 21, allowing investors to buy and sell shares without tipping their hand to the rest of the market. Exchanges began offering the service earlier. Europe’s largest dark pool, run by Cboe Global Markets Inc., is now doing more business through periodic auctions than it is through its dark markets.
For those who are really looking to have a laugh today, Goldman states that these auctions actually make trading more transparent.
“The launch represents the first bank-led periodic-auction book,” David Shrimpton, a managing director at Goldman Sachs, said by email. “The product will enable our clients to trade in a fair, multilateral and transparent environment.”
Only in the world of Goldman Sachs would brokering orders off of major exchanges for the purpose of keeping them confidential be more transparent.
The article continued, likely rightfully suggesting that these “auctions” will grow in size and frequency as demand for dark pool trades continues, despite the regulation:
Periodic auctions are increasingly seen as a way of sidestepping MiFID II’s curbs on dark trading. UBS Group AG will follow Goldman Sachs with its own service later this month, a spokeswoman said. Both firms are reacting to demand from their biggest customers. Fund managers need to complete their trades without moving share prices against themselves.
The auctions are coming to the fore because 755 European stocks are already banned from trading in dark pools, which hide orders until they have been matched. More names are likely to join that list when the European Union’s markets regulator updates it after the close of trading on Monday.
“Periodic-auction volumes will continue to increase,” said Mark Hemsley, chief executive officer of Cboe’s European arm. “The flipside is that our competitors are trying to get their own offerings out.”
MiFID II was introduced in Europe because regulators found “under intense lobbying from stock exchanges — that dark trading reduced the efficiency of stock markets as a whole. Fund managers, however, still need ways of trading that keep all the best bits of dark pools, so trading venues and banks alike have reacted by coming up with new ways to trade. Rather than driving trading volumes to the stock exchanges, MiFID II may have forced the exchanges’ rivals to become more innovative.”
We’ve already offered our prediction that MiFID would sever off independent research in this article out earlier this year. Now it looks like its being skirted as easily as it was implemented.
Once again we are faced with several follies of government regulation. First off, investment banks and those with the resources usually always find methods around them. Second off, they are obviously suppressing supply of a method for trading and transacting securities that is still in demand. Third, the government has to put its resources directly up against those of investment banks in order to regulate effectively, and this costs everybody, but especially taxpayers, money.
Though difficult to say if the regulators will have a next move in this game of “dark pool regulation chess” they are playing, one thing is for sure – we’re witnessing obvious blow-back to government overreach and regulation where demand is present.
We will keep our eyes open to see if European regulators volley back against these “auctions”.
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