Deutsche Börse insists Liquidnet deal is boosting block trades

Deutsche Börse claims its deal with Liquidnet to promote block-trading in its Xetra MidPoint dark pool is working, despite a fall in volumes.

Deutsche Börse claims its deal with Liquidnet to promote block-trading in its Xetra MidPoint dark pool is working, despite a fall in volumes.

The exchange operator is also planning to implement a minimum trade size threshold to placate brokers who withdrew their liquidity from the venue last month, fearing information leakage.

At the end of July, Xetra MidPoint introduced a block-trading system whereby its order book could be seen by Liquidnet and potentially match trades by tapping the additional liquidity available among Liquidnet members.

However, several brokers withdrew their liquidity due to concerns that Liquidnet members were able to see their orders.

The loss of these brokers has led to a rapid decline in turnover on Xetra’s dark order book. According to figures from Thomson Reuters Equity Market Share Reporter, the dark pool saw total turnover of €39 million in July with a market share of 0.11%, but in August this had dropped to €5 million, or just 0.01% of the market. In August 2012, Xetra MidPoint turnover was €44.6 million, with a market share of 0.19%.

Despite this, Deutsche Börse said it believes the deal with Liquidnet is bringing value to its members.

“Xetra MidPoint has been moderately successful, seeing around 100 transactions a day with an average turnover of around €4 million. However, we didn’t think this was really adding value to our members and Xetra MidPoint wasn’t really doing what it was intended to do, which is facilitating large orders in less liquid instruments,” explained Michael Krogmann, executive director and head of market development at Deutsche Börse.

Initial numbers from Xetra MidPoint’s link with Liquidnet show an increase in order sizes, with average execution size growing from €8,000 in July to €42,000 in August. The proportion of orders above €100,000 has also grown, from 3% in July to 17% last month.

“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,” added Krogmann.

It remains to be seen whether the threshold will result in a return of liquidity to Xetra MidPoint, but one broker that pulled its liquidity last month told “What we would need to see from Xetra is optionality added to the system. What is currently offered is not what our clients demand since most of them could get direct access to Liquidnet if they want it.”

Krogmnn insisted that orders were not leaving the Xetra MidPoint environment and said member anonymity was important. He also claimed that the deal with Liquidnet has 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.