Deutsche Börse replicates OTC trading venues with secondary market facility

Deutsche Börse has introduced a more advanced version of its Xetra electronic trading system on Monday (16.0 release). With the release, the operator of the Frankfurt Stock Exchange will be able to replicate the look and feel of OTC venues when investors submit requests for retail structured products on the exchange.

The new Quote Request functionality for structured products launched by the Börse Frankfurt venue is the result of an ongoing process addressing the trading needs of structured products issuers, brokers and investors with new tools and functionalities, said Florian Claus (pictured), member of the executive board of Börse Frankfurt Zertifikate. "This particular development is a response to demand from clients who are seeking to enable their clients to have similar options when submitting requests for retail structured products on OTC venues," said Claus. "[However], in regards to transparency and safety, an order on a regulated exchange has obvious advantages."

Börse Frankfurt is the first exchange to provide this kind of service for retail structured products issuers and investors in Europe, which is aimed at "adding value" as it will streamline the pre-trading process. "Investors will be able to request a quote through the specialist which will then have to be executed within maximum 30 seconds, or will be cancelled automatically," said Claus. "The specialists at Börse Frankfurt support securities trading by managing the order books for individual securities. They inform the market about current price levels by continuously providing quotes and ensure that all securities are tradable at all times."

According to Claus, with more than 1.4 million retail structured products listed on the exchange "it is quite difficult to provide liquidity just from the order book itself" and the majority of the liquidity on the listed products "comes from the issuer to the specialist, who is managing the order book on behalf of the issuer".

"Without the new quote request functionality, clients would place a market/limit order which goes to the exchange´s order book without knowing exactly when and at what price the order will be executed," said Claus. "With the new tool, retail clients can request a live price, even though they do not have a live price feed. In case of 'accepting' the quote, a limit order will be generated, which then is being executed right away at limit or better."

The new order functionality is for existing products, a secondary market facility to combine "the best of two worlds": the so called 'direct trading' (which was so far only available in OTC-venues) and 'on-exchange trading'.

Claus said the new functionality is targeted at online brokers "which make a significant portion of Germany's retail structured products market", and that the exchange is committed to also implement new developments for the sell-side, "the issuers of structured products".

In addition, the Frankfurt exchange has added new matching functions specially designed for larger volume orders aimed at supporting "customers from an early stage concerning the implementation of regulatory requirements resulting from the European Union Markets in Financial Instruments Directive, Mifid II" in a move to increase the attractiveness of on-exchange trading compared to OTC trading.

The new Volume Discovery Order (VDO) is a Mifid II-compliant solution for safe execution of large orders on Xetra with minimum market impact. The EU financial market directive will only allow a very limited proportion of order volume to be traded on dark pools; market participants will therefore need an alternative for large-volume orders and the VDO offers this alternative. The new order type has received a dedicated Waiver from the European Securities and Markets Authority (Esma) and the Hessian stock exchange regulator and is therefore not subject to the volume caps restriction. The VDO is based on the existing Iceberg Order and enables the hidden part of the order to be executed against other VDOs at the midpoint of the bid-ask spread in the order book through a second limit. A number of asset management institutions Allianz Global Investors, Deka Investment and Union Investment have welcomed the new order type, stated the exchange.

Another new feature is the Designated Sponsor Quote Request for ETFs and exchange-traded products (ETPs), which combines the features of OTC and exchange trading. Market participants on Xetra will thus be able to enter quote requests and trade against the quote directly in the order book providing potential price improvements for large orders as a result of interaction with the entire order book, from efficient order processing along the existing process chain and from the security of a central counterparty.

Turnover for structured products at the Frankfurt Stock Exchange year to date is €16bn (single counted).