What can the floor of the future do for investors?
Background knowledge on the migration of Xontro and Xetra
Frankfurt Stock Exchange migrated floor trading to the trading system Xetra on 23 May. Now two different market models allow for trading 700,000 instruments on Xetra:
- The traditional Xetra technology with the tried and tested market model of continuous trading in combination with the open order book, where prices are quoted fully-electronically.
- Trading with the support of Xetra Frankfurt Specialists select Frankfurt as stock exchange in your order mask, as usual.
Although orders are carried out automatically with the latter version, specialists, however, supervise the trading activities, provide liquidity if necessary and include reference markets. This is not entirely new for investors in certificates and funds, as these asset classes on Xetra have been supervised by specialists for more than three years. That is why the switch in this step especially regards stocks and bonds these total to 36,000 securities.
The most important aspect in advance: Nothing changes for investors when entering orders, as you will still find Frankfurt in your order mask.
The migration to the new market model offers substantial advantages to investors:
- Xetra is a European trading network comprising 18 countries. The number of banks connected to the Frankfurt Stock Exchange, will nearly double.
- This will provide additional liquidity on the platform and will subsequently lower trading fees, e.g. by tighter spreads, and further improve market quality.
- Xetra offers the latest technology, as it offers state-of-the-art technology in terms of safety, availability, reliability and speed.
The old trading system for floor trading had been proven effective. However, a rapidly changing market has greater requirements on exchange markets. In the past, FWB lead brokers were intermediaries, now in the function as Specialist, above all, they provide liquidity in form of bid and ask prices. As a result, the actual task of lead brokers now Specialists has significantly changed. Like in continuous trading, the machine fixes the price these days, the Specialists supervise it. Investors will benefit from faster order processing. The switch will strengthen the competitive position of the Frankfurt Stock Exchange within the financial industry which is getting increasingly international and particularly with OTC trading platforms. This will also have advantages for investors, as those alternative platforms only hive off the best bits in form of the blue chips. At the Frankfurt Stock Exchange, in contrast, good prices will also be fixed for second-line equities, and above all, in a regulated and supervised environment.
But what has not changed are the advantages of the Frankfurt Stock Exchange. The Xetra Frankfurt Specialists offer individual support of every single order. This is particularly important for securities which have a reference market. Funds, for example, the price is not based on offer and demand, but on the prices of the securities included in the fund. Specialists thus complete 80 percent of all orders via investment companies and not via other investors. Prices for certificates are based on the investors quote. The two asset classes have also been traded according to the Specialist model for three years now. Xetra provides the technology; the Xetra Frankfurt Specialist adds the human element. This combines the advantages of both Xetra and Frankfurt Stock Exchange.
Support is also necessary for trading bonds, as a lot of fixed interest securities are exchanged through interbank transactions, and off a stock exchange. Specialists focus on these reference prices. This also applies to foreign shares which have a different domestic market. Thus, Specialists can also provide liquidity for trading shares of smaller companies. What also remains unchanged is the advantage of an exchange market regulated by the Market Surveillance Office, which investors can always contact unlike in OTC business in case of questions or problems.
In a nutshell, the human component is the major benefit for investors using the Xetra Frankfurt Specialist trading. The technology can provide support for people at this point, but they remain irreplaceable. Also, the trading floor will remain the face of the stock exchange. You can still come and visit us there. The Specialists obligation for presence there is also stipulated in the stock exchange regulations.
In Specialists-supported trading, the partial order execution is usually avoided when it does not seem economically sensible. Yet, partial order execution offers some advantages, too. Often, trades can be executed to better prices and at different times, compared to full order execution. In addition, intraday partial orders will not be charged by the stock exchange and more and more banks pass on these benefits.
What impacts the shift will have on the transaction fees, depends chiefly on your bank, as it decides on the costs and fees itself and it is engaged in competition with other banks.
The new market model also offers investors another order supplement, the stop-limit orders. This enables you to put a limit (stop) at which point a limit order is released. This being so, investors can insure that their orders are not executed at the closest price when this price has reached your stop-limit, but up to the limit price you have previously entered. This order supplement can prevent you from unpleasant surprises, especially in the case of papers in narrow markets. However, it carries the potential risk that the order might not be executed at all.
© 23 May 2011/Edda Vogt