Encouraged by some of its largest customers, Deutsche Börse’s revival of its midpoint product is set for a November launch, having begun discussions a year ago.
The move comes as an increasing number of clients have begun to seek dark offerings from primary exchanges in order to avoid having to go elsewhere – which creates a time delay and subsequent reduction in the efficacy of a trade due to the potential for market impact.
Deutsche Börse’s new service – known as ‘Xetra Midpoint’ – offers an integrated solution for German instruments.
When using the mid-point service, traders will be able to choose between midpoint orders to trade in the midpoint book only and a dark-lit sweep order.
This has a strong use case for price improvement in comparison with aggressive execution in the central limit orderbook, Deutsche Börse’s project manager for Xetra Midpoint, Maximilian Trossbach, asserts.
The intention is to build a midpoint trading facility in an order book that is hosted on the same machine as the reference market order book.
Read more: Deutsche Börse launches Xetra market close mechanism
“We’re building it in a way that it has no disadvantage over the existing standard limit orders, and we also want to make the implementation for our clients as easy as possible,” says Trossbach.
“[…] The Xetra lit book is the source for the midpoint that serves as the reference price in the midpoint order book. There is also an order type – the sweep order – where you can check for executions in both books starting in the midpoint and take out everything that’s immediately there. Any remaining quantity then goes into the lit book. That’s the way they are integrated, and we have also built prototypes for the matching algorithm and have tested that, primarily for speed.”
Client led development
As part of its client-led approach, Deutsche Börse tells The TRADE that applications for new MIC codes for the midpoint order books have been a key focus following client discussions which found them to be the preferred route for trade reporting and order routing logics.
All trading will be under the operating MIC of Xetra (XETR) before the deployment of dedicated segment MIC codes for midpoint trading only. The new codes are reserved and set to be published soon following application to the International Organisation for Standardisation (ISO).
Read more: European Commission hurries through last minute revision to Mifir text to plug dark trading loophole
This is a key example of where client demand led product development, Trossbach explains, suggesting there could have been a more simplistic, though admittedly less attractive, approach to pushing Xetra Midpoint live.
“We could have simply introduced some flag in the trade notification that tells you ‘this is midpoint’ without using a separate MIC, but clients wanted it, so they get it,” he says.
An integrated approach
Deutsche Börse’s focus is on having a synchronous service across its dark and lit books in one queue so as to ensure no disadvantage when it comes to using dark-lit sweep for all aggressive flow. Specifically, this means achieving efficacy without sacrificing speed.
This however, as the industry is acutely aware, is a technological challenge, in particular as matching logic in midpoint book is more complex than in the lit.
Delving into this, Trossbach says: “Minimum acceptable quantity (MAQ) is an additional aspect that you need to consider in the matching. Imagine there is a resting sell order in the midpoint book with an MAQ of 100 shares and a resting buy order with a total quantity of 60, then another buy order comes in with a quantity of 40. We aggregate the two buy orders to be executed against the resting sell order.
“This is done by a matching algorithm that seeks the combination of executable orders which maximises the overall executable volume at the given midpoint price and under consideration of individual MAQs.”
Currently, Deutsche Börse sees a lot of high frequency trading in its lit book, which becomes tricky to replicate in a dark book environment.
“The midpoint book could offer opportunities for slower moving clients who sometimes aren’t able to be first in the queue in our lit book to place a passive order with highest priority when executed against a dark-lit sweep,” explains Trossbach.
The potential benefit of Deutsche Börse’s so-called integrated approach is closely linked to the latency arbitrage which exists when it comes to third party venues. Other exchanges, such as Euronext, mirror Deutsche Börse in terms of their set up, where information travels from Bergamo and London, and Frankfurt and London respectively.
Recently, Euronext confirmed the launch of its ‘Dark Mid Point Match’ service after relocating its servers to a data centre in Bergamo, in a similar attempt to bridge the latency gap.
From his side, Trossbach explains: “There could be private connections that are simply faster. So, if you are not on the fast side of things in the London venue then you might get picked off systematically at prices that are not advantageous for you because your counterparty already knows what the next price will be.
“Therefore, we hope that the fact that that we have it as an integrated trading mechanism (literally on the same machine in the same location) will be a key argument for clients to potentially choose our venue.”