## Single Volume Cap To Reshape European Equity Markets, Forcing Liquidity To New Venues A fundamental shift in European market structure is imminent as the Double Volume Cap (DVC) mechanism gives way to a more streamlined Single Volume Cap (SVC). This regulatory evolution, born from a review of the Markets in Financial Instruments Directive (MiFID II), is poised to re-route trading flows, impacting overall market liquidity and fragmentation. The transition to a 7% single volume cap is designed to simplify a system that proved to be overly complex and ultimately ineffective in achieving its primary goal ▴ to move a substantial amount of trading from “dark”, non-transparent venues to “lit”, transparent exchanges. The move to a single cap is a direct response to the shortcomings of the DVC.
The DVC, with its dual 4% venue-level and 8% market-wide thresholds, was found to be over-engineered and did not have the intended effect of significantly reducing dark trading. Instead of migrating to lit markets, trading volumes found new homes in other dark or quasi-dark venues, such as periodic auctions and, most notably, Systematic Internalisers (SIs). The new SVC, therefore, is not just a numerical adjustment but a strategic simplification aimed at creating a more efficient and transparent market structure. The introduction of a single, higher threshold is expected to have a nuanced impact on market liquidity.
While the cap is designed to increase transparency by limiting dark trading, it may also lead to new forms of fragmentation as market participants adapt their trading strategies. The experience with the DVC has shown that trading is fluid and will find the path of least resistance. As the SVC is implemented, the behavior of SIs, the growth of periodic auctions, and the response of institutional investors will be critical in determining the future landscape of European equity markets. ### The Intricacies of Volume Caps and Market Fragmentation The regulation of dark trading in European equity markets is a complex endeavor, balancing the need for transparency with the desire of institutional investors to execute large orders with minimal market impact.
The introduction of MiFID II in 2018 brought with it the Double Volume Cap (DVC) mechanism, a key tool in the regulator’s efforts to illuminate the darker corners of the market. The DVC was designed to limit the amount of trading that could occur in dark pools under certain waivers, with the goal of encouraging more activity on transparent, “lit” exchanges. The DVC operated on two levels ▴ a 4% cap on the proportion of a stock’s trading that could occur on any single dark venue, and an 8% cap on the total trading of a stock across all dark venues. If either of these caps was breached over a 12-month period, the use of the waivers that allow for dark trading would be suspended for that stock for six months.
The intention was clear ▴ to prevent the erosion of the price discovery process that occurs on lit markets by limiting the amount of trading that happens away from public view. However, the practical application of the DVC revealed its limitations. Rather than a wholesale shift of volume to lit exchanges, the market adapted. Trading that would have previously occurred in dark pools migrated to other venues that were not subject to the caps, such as periodic auctions and Systematic Internalisers (SIs).
This migration highlighted a key challenge in market regulation ▴ the “waterbed effect,” where restricting one type of activity simply causes it to pop up in another, often less-regulated, form. > The Double Volume Cap, while well-intentioned, ultimately failed to achieve its primary objective of moving significant trading volumes to lit markets, instead leading to a re-shuffling of dark liquidity. The move to a Single Volume Cap (SVC) of 7% is a direct acknowledgment of the DVC’s shortcomings. The SVC simplifies the regulatory framework by removing the venue-level 4% cap and establishing a single, market-wide threshold.
This change is intended to be less complex to monitor and implement, while still placing a meaningful limit on the amount of dark trading that can occur under the reference price waiver. ### The Rise of Systematic Internalisers Systematic Internalisers (SIs) have become a central feature of the European equity market landscape, particularly in the context of the volume caps. An SI is an investment firm that deals on its own account by executing client orders outside of a regulated market or multilateral trading facility (MTF). In essence, an SI is a single-dealer platform where the firm acts as the counterparty to its clients’ trades.
The growth of SIs is a direct consequence of the regulatory environment created by MiFID II. As the DVC placed restrictions on dark pool trading, SIs emerged as an attractive alternative for market participants seeking to execute trades with minimal market impact. Because SIs operate under a different set of rules than dark pools, they were not initially subject to the same volume caps, making them a natural destination for displaced trading volumes. The table below illustrates the key differences between dark pools and SIs ▴ | Feature | Dark Pools | Systematic Internalisers (SIs) |
| :— | :— | :— |
| Trading Model | Anonymous, multilateral trading | Bilateral trading with a single dealer |
| Transparency | Pre-trade opaque | Pre-trade quotes for certain order sizes |
| Volume Caps | Subject to DVC and now the SVC | Not subject to the same volume caps |
| Counterparty | Multiple, anonymous participants | The SI firm itself | The role of SIs is not without controversy.
Critics argue that they contribute to market fragmentation by creating a two-tiered market ▴ one for retail and smaller institutional investors on lit exchanges, and another for larger players who can access the liquidity offered by SIs. This can potentially harm the price discovery process, as a significant portion of trading volume is not exposed to the broader market. However, proponents of SIs argue that they provide valuable liquidity and allow for the efficient execution of large orders. They contend that SIs are a necessary part of a modern market structure, providing a service that is not always available on lit exchanges.
The new regulatory framework under the MiFIR review seeks to address some of the concerns around SIs by refining their pre-trade transparency requirements and ensuring a more level playing field between different types of trading venues. The future of SIs will be closely tied to the implementation of these new rules and the overall evolution of the European market structure. ### The Anticipated Effects of the Single Volume Cap The transition to a Single Volume Cap is expected to have a number of significant effects on the European equity markets. The primary goal of this regulatory change is to simplify the existing framework and, in doing so, to create a more efficient and transparent market.
However, the precise impact on market liquidity and fragmentation will depend on how market participants adapt their behavior in response to the new rules. Here are some of the key anticipated effects ▴ Increased Transparency ▴ By setting a clear, market-wide limit on dark trading under the reference price waiver, the SVC is expected to increase the proportion of trading that occurs on lit venues. This, in turn, should improve the price discovery process and create a more level playing field for all market participants. Shifting Trading Volumes ▴ Just as the DVC led to a migration of trading to SIs and periodic auctions, the SVC is likely to cause another re-shuffling of trading volumes.
Market participants will seek out the most efficient and cost-effective ways to execute their orders, and this may lead to the growth of new trading venues or strategies. Impact on Algorithmic Trading ▴ Algorithmic and high-frequency trading firms will need to recalibrate their strategies to account for the new volume cap. This could lead to changes in how they source liquidity and manage their order flow, with potential consequences for market volatility and liquidity provision. Challenges for Institutional Investors ▴ Institutional investors who rely on dark pools to execute large orders will need to find alternative ways to minimize their market impact.
This could involve a greater use of SIs, periodic auctions, or new and innovative trading strategies. > The success of the Single Volume Cap will ultimately be judged by its ability to strike the right balance between promoting transparency and allowing for the efficient execution of large trades. The table below summarizes the potential impacts of the SVC on different market participants ▴ | Market Participant | Potential Impact of the Single Volume Cap |
| :— | :— |
| Institutional Investors | May face challenges in executing large orders with minimal market impact; may increase their use of SIs and periodic auctions. |
| High-Frequency Traders | Will need to adapt their algorithms to the new regulatory environment; may find new opportunities in providing liquidity across different venues.
|
| Retail Investors | May benefit from increased transparency and a more level playing field; may see tighter bid-ask spreads on lit exchanges. |
| Trading Venues | Lit exchanges may see an increase in trading volumes; dark pools will face new restrictions; SIs may continue to grow in importance. | The move to a Single Volume Cap is a significant development in the ongoing evolution of European market structure. While the ultimate effects of this change remain to be seen, it is clear that it will have a profound impact on how trading is conducted across the continent. ### References
- ESMA. “ESMA prepares for switch toward single volume cap in October 2025.” 2025.
- Hagströmer, Björn. “Market Fragmentation in Europe.” Squarespace, 2022.
- Ran, Zhenkai. “MiFID II ▴ the Impact of Double Volume Cap Mechanism on Market Quality.” ResearchGate, 2022.
- ION Group. “MiFID II 2025 review ▴ Market structure regulation update.” 2025.
- Foucault, Thierry. “Impact of Market Fragmentation on Liquidity.” 2014.
- Oxera. “Has market fragmentation caused a deterioration in liquidity?” 2020.
### Reflection The shift from a Double to a Single Volume Cap is more than a mere technical adjustment; it is a reflection of the ongoing dialogue between regulators and the market. The experience with the DVC has provided valuable lessons about the adaptive nature of financial markets and the challenges of imposing rigid constraints on trading behavior. The move to a simpler, more streamlined SVC is a pragmatic response to these lessons, an acknowledgment that regulation must be both effective and efficient. As we look ahead to the implementation of the SVC, the key question is not whether it will be a “perfect” solution, but whether it will be a “better” one.
Will it succeed in fostering a more transparent and resilient market structure, or will it simply create new and unforeseen forms of fragmentation? The answer will lie in the data, in the careful analysis of trading volumes, bid-ask spreads, and other measures of market quality. But it will also lie in the ongoing dialogue between all market participants, in the shared commitment to building a market that is both competitive and fair. The journey towards a more perfect market is a continuous one, and the Single Volume Cap is but the next step on that path.
Glossary
European Market Structure
European Equity Markets
Systematic Internalisers
Periodic Auctions
Market Participants Adapt Their
Institutional Investors
Double Volume Cap
Dark Trading
Price Discovery Process
Lit Exchanges
Single Volume Cap
Trading Volumes
Reference Price Waiver
European Equity
Minimal Market Impact
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Market Fragmentation
Market Structure
Level Playing Field
Equity Markets
Market Liquidity
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Single Volume
Large Orders
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