Since launching in 2007, Chi-X, the pan-European multilateral trading facility run by Nomura’s Instinet, has made notable inroads into the market for trading German stocks, regularly trading more than 15% of the daily turnover of blue-chip companies such as BASF. At the same time, however, Xetra, Deutsche Börse’s order book, has increased its market share of domestic trading to a record 99%.
"The Xetra Best functionality is really suited to brokers that have to meet the best execution requirements of Mifid" Michael Krogmann, Deutsche Börse
These two trends, which at a glance seem to be at odds with each other, highlight the different ways in which small and large brokers are responding to the best-execution requirements of the EUs Markets in Financial Instruments Directive (Mifid).
Smaller brokers are being forced because of cost constraints to either define best execution narrowly as the Xetra price, as opposed to a price quoted on one of Germanys seven other regional exchanges, or effectively outsource execution to larger brokers. However, the brokerage houses with the biggest wallets, the global investment banks, are investing in technology to enable them to compare and exploit the prices on numerous competing venues.
For the global investment banks, execution has turned into a technological arms race requiring multi-million dollar budgets to stay in the game. The technology needed to exploit new alternative execution venues with different market models such as dark pools in an intelligent way is simply out of the reach of smaller brokerage houses.
Although Mifid was designed to encourage competition between exchange venues, the decision of many small domestic brokers to opt for a definition of best execution as the Xetra price, because it is the largest and most liquid order book for German stocks, has actually reinforced Deutsche Börses dominance of domestic trading. Germanys regional exchanges, with the exception of the Berlin Bremen Stock Exchange, have yet to come up with new strategies to fight back.
The Berlin Bremen Stock Exchange, the largest of the regional exchanges, plans to launch a pan-European MTF called Equiduct later this year. It will offer two alternative market models that provide a definition of best execution based around the European best bid/offer, a price that it will calculate based on the prices offered at all competing venues.
Retail brokers in Germany are increasingly turning to larger brokerages to provide their clients with best execution, a trend that Deutsche Börse is also capitalizing on through a bilateral exchange-based platform called Xetra Best, which, since relaunching post-Mifid, has attracted a rapid increase in turnover. Xetra Best connects retail order providers with larger brokers that act as best executors by guaranteeing immediate and full execution with a minimum price improvement of 0.1%.
"The Xetra Best functionality is really suited to brokers that have to meet the best execution requirements of Mifid," says Michael Krogmann, head of cash market development at Deutsche Börse. "Since relaunching in July weve attracted 10 online banks and our first foreign bank to the system."