Finance Assignment Paper-‘double cap’

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‘double cap’

At the beginning of 2018, regulation came into force in Europe that imposed a ‘double cap’on dark pool trading in Europe. This regulation was intended to improve the ‘quality’ ofEuropean equity markets.

  1. a)  Describe how dark pools work (in Europe) and how they have affected market structure up to the beginning of 2018. Also describe the new regulation which caps dark pool trading.
  2. b)  Review the recent academic literature of the effects of dark trading on market liquidity and price discovery (noting that in this review you will be expected to go beyond the few papers discussed in the lectures).
  3. c)  From the ESMA website, collect data showing which stocks have had the double cap imposed. Choose a reasonably sized subset (e.g. 25+) of stocks from a particular country or market that have been excluded from dark pool trading. Use Bloomberg to download daily prices and traded volumes for those stocks starting at the beginning of 2017 and ending at the present day.
    1. Investigate whether imposing the double volume cap has had any statistical effect on volumes (a regression for each stock involving dummy variables might help you here).
    2. Use some regression analysis to investigate whether there has been any effect of the ban on volatility (measuring the volatility of a stock on day t as the square of its return on that day). You will likely want, in your regression, to control for autocorrelation in volatility.
    3. If you can get any other liquidity data for these stocks, look for traces of an effect of the ban on that liquidity data
  4. d)  Based on your analysis, indicate whether you think that there is any evidence that the double-cap has affected liquidity. Reflect on the robustness of your statistical framework.

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