Xetra, the Frankfurt-based equities market owned by Deutsche Börse, told members in a market notice on August 22 of its intention to run a trial liquidity provider programme in DAX30 instruments – its most liquid stocks – from October 4 to March 31.
The scheme will be available to both direct members of the exchange and their end clients, including high-frequency trading firms and other proprietary trading outfits, and will offer rebates on trading fees in the hope of attracting more activity.
Xetra will reward firms that quote DAX30 prices in volumes of at least €5,000 for 20% of the trading day or more. Firms will also be required to have a 1% share of passive volume in DAX30 stocks. Passive orders are typically placed by market-makers or prop firms to populate an order book and provide liquidity.
Christian Schürlein, head of institutional sales at Deutsche Börse’s cash market, said: “This is an incentive scheme for those members who want to continually provide liquidity and the underlying idea is that the total membership will benefit from lower implicit costs in trading by lower spreads and deeper liquidity.”
The scheme is similar in nature to one that will be trialled by Euronext later this year. The operator of markets in Paris, Amsterdam, Brussels and Lisbon will pilot its six-month liquidity scheme in the fourth quarter. The exchange has said its scheme will only be open to proprietary trading firms that access its markets through a broker.
Liquidity schemes such as these are typically only available to direct members of an exchange, meaning prop firms that prefer to trade via a broker, often for reasons of cost or anonymity, miss out. However, exchanges are looking at new ways of building liquidity that do not require firms to bear the costs of becoming a full member.
Under new EU trading rules being introduced under the revised Markets in Financial Instruments Directive, due to be implemented in 2018, stock exchanges will be required to have formal agreements in place with proprietary trading firms that act as market-makers.
Schürlein said: “Our contractual partner will always be a direct member, but of course we cannot always influence the decision of firms to be members. We therefore also encourage liquidity from non-member firms.”
He added that the first month of the trial scheme will serve as a “grace period” with halved minimum performance levels to help jump-start the programme – the so-called presence time will be 10% of the trading day, while the minimum passive volume share will be 0.5%.
Trading firms that meet these criteria in DAX30 instruments will receive a 100% fee rebate on passively executed orders. The pilot will run in parallel with two other liquidity and market making schemes that Xetra operates, though neither of these is open to non-member firms.