SELLSIDE RALLIES TO CHALLENGE DEUTSCHE BÖRSE – LIQUIDNET TIE-UP.
Tim Cave and Anish Puaar, Financial News
05 Aug 2013 Updated at 09:59 GMT
Two of Europe’s largest brokers have pulled out of a dark pool run by German exchange Deutsche Börse, after it launched a partnership with buyside-only venue Liquidnet in a bid to boost volumes on both platforms.
The move was in response to a new service the platform launched on July 29 with Liquidnet, allowing orders above a certain size to interact with orders resting on Liquidnet’s venue. But brokers fear the service allows Liquidnet’s members to view information about MidPoint orders without an obligation to trade against them.
Brian Gallagher (left), head of European electronic trading at Morgan Stanley, said: “With this link, a Liquidnet member knows there is a buyer of a stock that meets a certain size but isn’t obligated to execute. This means we lose control of our orders and there is the potential for information leakage.”
On July 29, Credit Suisse sent a note to clients saying it had stopped routing orders to MidPoint: “Our policy is that orders sent to trading venues must not be onward routed to other venues.” It said it would review the decision “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 value of trading in the Xetra MidPoint dark pool fell sharply at the start of last week. Between July 29 and July 31, the platform conducted trades worth around €716,000, compared with the €2.5 million traded on the Friday before the link went live, according to data from Thomson Reuters. Last Thursday (1 August), volumes recovered partially to €1.9 million.
Since the launch of the service, the average size of trades in Xetra MidPoint has increased tenfold to €100,000, according to Deutsche
Börse.
Michael Krogmann, its head of market development, said in an e-mailed statement: “The integrity of the market is a very high value for Deutsche Börse.
When we developed the Block Agent model, we defined parameters, processes and requirements which are all specified in the exchange rulebook. Our objective was to protect the integrity, safety and stability of our members and our market at any time.”
Mark Pumfrey (right), head of Emea at Liquidnet; said in an e-mailed statement that it had seen a “very positive response” for the service.s to protect the integrity, safety and stability of our members and our market at any time.”
The backlash is a further sign of the growing tension between exchanges and brokers over the issue of trading in off-exchange, dark-pool platforms. Exchanges are leading calls to restrict trading in dark pools, contesting they damage price formation in the lit markets, while brokers maintain they help ensure better prices for institutional clients.
