German Dark Pool Closes Three Years After Major Brokers Revoltedby
Morgan Stanley, Credit Suisse withdrew amid trading quirk
Incoming European rules will limit dark-pool market share
Deutsche Boerse AG is closing its dark pool for stocks, a sign the venue never recovered after major brokers unplugged from it three years ago.
The company confirmed its dark pool, called Xetra MidPoint, will close this summer. Brokers Credit Suisse Group AG and Morgan Stanley stopped sending orders to it in 2013 because they worried a quirk in the system, involving a partnership with Liquidnet Holdings Inc., allowed other traders to sniff out their trading intentions, according to reports at the time.
While Xetra MidPoint’s market share dwindled following the revolt, dark pools remain popular. So-named because they hide bids and offers before a transaction takes place, dark pools were designed to make it easier to trade large blocks of stock. At least three new ones have been introduced in Europe in recent years.
A Deutsche Boerse spokesman said the company will rely on auctions and a new order type to allow firms to continue executing large trades. Liquidnet didn’t reply to a request for comment, while Credit Suisse and Morgan Stanley declined to comment.
With more dark pools comes more market fragmentation, which is a concern because it risks making trading more difficult and complex. An overhaul of European Union financial regulations, called MiFID II, that comes into force next year will limit the amount of trading that’s allowed in the dark.
Market operators are adapting to the requirements, but their innovations may make the market even more convoluted. More complexity could make it more expensive to trade and may create unexpected winners and losers.
“One unintended consequence of MiFID II is definitely more complexity with regards to new services and order types,” said Anish Puaar, a European market-structure analyst at Rosenblatt Securities Inc.