Deutsche Boerse confirms dark pool closure

Xetra MidPoint to close this summer ahead of MiFID II's large-in-scale waiver.

Deutsche Boerse has confirmed it will close its dark pool Xetra MidPoint in the summer of this year, several years after it signed a controversial deal with Liquidnet.

The exchange told The TRADE it would be implementing a new trading system in anticipation of MiFID II‘s large-in-scale waiver and there would be no reason to continue dark pool trading for small-size transactions.

“Xetra MidPoint today supports dark trading for all trade sizes. With the volume thresholds of 4% and 8% in the reference price waiver we see limited potential for this transparency waiver.

“That’s why we will no longer offer MidPoint after our technology upgrade to a new system in summer 2017. We trust that our existing auction mechanism as well as our Volume Discovery Order from 2018 onwards are viable options to execute large-in-scale orders under MiFID II,” a spokesperson said.

Xetra MidPoint came under fire after Deutsche Boerse partnered with Liquidnet in 2013 and it allowed large-scale orders to interact with orders resting on Liquidnet’s venue.

The model connected 240 Xetra members to Liquidnet’s network and both parties said the partnership would combine liquidity from multiple sources and increase the probability of large orders being executed at midpoint. 

Speaking at the time, Mark Pumfrey, head of EMEA at Liquidnet, explained: “ When combined with an average execution size of €1.1 million on our platform, the Xetra MidPoint liquidity will significantly enhance institutional block trading in German stocks.

“We believe this cooperation will make trading of these stocks more efficient, drive performance, and lead to an increase in foreign institutional investment.” 

However, it led to Morgan Stanley and Credit Suisse pulling out of the dark pool due to fears the changes would allow Liquidnet’s members to see information on orders without having to trade against them.

Credit Suisse sent a note to its clients at the time explaining its policy is that “orders sent to trading venues must not be onward routed to other venues… when we receive either an explicit opt-out for flows, or a guarantee that no order information is sent to third-party providers from this venue”.

The loss of these brokers led to a rapid decline in turnover on Xetra’s dark order book.

According to figures from Thomson Reuters at the time, the dark pool saw total turnover of €39 million in July 2013 with a market share of 0.11%, but by August that year, this had dropped to €5 million, or just 0.01% of the market.

Michael Krogmann, executive director and head of market development at Deutsche Boerse, said at the time: “We have had some concerns raised by members who were actively trading on Xetra MidPoint, mostly those trading relatively small orders in highly liquid stocks and so we have this month added a €100,000 threshold before orders are available to Liquidnet members.”

Krogmnn insisted orders were not leaving the Xetra MidPoint environment and said member anonymity was important. He also claimed that the deal with Liquidnet helped attract the attention of new members based in Germany who were keen to make large trades of less liquid mid- and small-cap stocks.