Brokers may not smart route to LSE’s hidden order types

Sell-side institutions that direct client flow via smart order routers are unlikely to use the London Stock Exchange’s (LSE) proposed hidden or dark order types because of the restrictions imposed by MiFID’s large in scale (LIS) rules.

The LSE will introduce hidden limit order types on its SETS electronic order book on 16 March. This will allow traders to interact with displayed and non-displayed liquidity on the LSE without displaying price or volume to other participants. The initiative is seen as particularly useful to market participants looking to execute large block trades with minimal market impact.

But to forego MIFID’s pre-trade transparency requirements – and therefore preserve the anonymity of dark functionality – the LSE has to comply with LIS restrictions. (Unlike dark pools, the LSE cannot use the alternative price reference waiver available under MiFID because it is a primary exchange.) LIS rules only permit hidden or dark orders if they are above minimum order sizes, based on the average daily turnover and market capitalisation of a stock, as defined by the Committee of European Securities Regulators.
This means that dark orders sent to multiple venues could fall below size levels required by regulators, if sliced too thinly.