Trading Investment and Leverage Products
The Trading Process
You have a market idea or would simply like to invest with little risk but not without the chance of receiving return. First, you search for the fitting product, either with the search function, by using the certificate matrix, financial literature, or another website. Then you place an order with your bank or online broker, while at the same time deciding whether your order should be executed on a stock exchange, and, when yes, on which one, or if it should be executed off-exchange. If you want to trade on the Frankfurt Stock Exchange, you choose “Frankfurt” as your chosen place of trading.
When investors buy or sell a security on the Frankfurt Stock Exchange with Smart Trading standards, the order goes from the bank first to the lead broker who is in charge of the order book for the chosen product. The lead broker sees in his or her limit control system, whether the order can be carried out for the issuer or another investor. He or she has a direct line to the issuer, on which he or she can ask the buying and selling prices, also known as quotes. In just one second, the lead broker has the current price and can round up the transaction in 30 seconds, usually even faster.
Immediately after the order has been executed, the lead broker then does the necessary business with the issuer. If the investor has bought 1000 warrants, for example, the lead broker must immediately buy these 1000 warrants from the issuer after order execution. If the lead broker finds an order from another customer in his or her order book that matches the first order, he or she executes both orders against each other. However, even with the most liquid titles, only around 5 percent of all transactions are executed in this way. 95 percent of transactions are carried out by the lead broker with the issuer.
Important to remember is that the lead broker only mediates and doesn’t make transactions on his or her own behalf. This eliminates the possibility lead broker speculating about his or her customers and putting his or her own interests first. The lead broker only earns money from the commission.
If the transaction occurs off-exchange, the order goes directly to the issuer. The disadvantage of so-called ‘over the counter’ (OTC) trading: Limit or stop orders are not possible between investor and issuer. And they can be important in the case of volatile prices. In addition, there is only a quote history with on-exchange trading. With historical quotes, investors can always check whether they have been dealt with fairly.