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Technology revolution that burst out into blossom in 20th century changing the face of the whole world didn’t skirt the stock exchanges. The introduction of Xetra® impacted greatly the way the stocks are traded today in Germany and across the globe. While there are still buildings and noble edifices worldwide where stock exchanges supposedly allocate their trading floors actually major part of the trading today, at least this is the case with the Frankfurter Wertpapierbörse, is performed not within the area of the stock exchange physical floor. At present the building of the Frankfurt Stock Exchange serves just as a tangible expression of the historically formed institution that plays one of the main roles in the economy life of the nation.

No need in brokers?

Boisterous share trading and brokers shouting and gesticulating, this is the typical picture of how we imagine a stock exchange which is in addition maintained by the movie makers. Besides, visitors that have the opportunity to view the trading floor of the Frankfurt Stock Exchange from the Visitors Gallery see lead brokers’ desks in front of the DAX board backdrop and relate this environment directly to the stock exchange itself. And only expert players know that the actual trading takes place somewhere else. Yet, no matter how symbolical the building becomes access to the trading floor is not available to the general public but to authorized trading participants, who buy and sell securities on behalf of their customers. But you can surely take a look at it under special tour program provided by the Visitors Center.

So, the electronic trading system Xetra® came to replace broker supported floor trading. Today domestic shares along with ETFs are traded mainly via Xetra while less liquid securities as well as smaller cap shares, foreign shares, investment funds and almost all bonds are still traded on the Frankfurter floor. Besides, after the trade closes on Xetra at 5.30 p.m. late trading in all securities occurs exclusively on the floor.

Still, it is not just about the volumes of trading shifted to Xetra when we talk about the changes experienced by the Frankfurt Stock Exchange within the last decade, it is also about the trading on the floor which is now as well supported by a computer system known as Xontro. With the computerized platform market participants no longer need to come to the trading floor, but they make their deals from special trading rooms from within their banks.

Thus, when trading occurs with Xetra it means that the electronic trading system collects buy and sell orders of licensed traders in a central computer. When the number of securities and their price correspond the orders are automatically matched. In such a way 90% of the entire share trading is performed in Germany today with 1/5 of these orders placed by private investors.

The introduction of a new market model in 2008 allowed trading of certificates and warrants to run through Xetra. In this environment specialists that are, as we know, peculiar feature of the NYSE, perform the function of market makers executing orders based on quotes set by the issuer.

Among the main advantages available with Xetra trading there are the following mentioned on the Deutsche Börse web site:

•    Fair pricing: the high trading volume ensures that the orders are executed rapidly, fully and at fair prices.
•    Low costs: there is no brokerage fee.
•    High speed: the fully electronic matching of orders guarantees fastest execution times, regardless of whether a share or a whole block of shares is traded. During long trading hours: Xetra trading takes place on each trading day between 9am and 5.30pm.
•    A broad selection: on Xetra almost all of the shares listed at FWB® Frankfurter Wertpapierbörse (Frankfurt Stock Exchange) can be traded. There are currently almost 6,000 securities.
•    Room for wishes: order addenda define in Xetra trading how an order is to be executed.

Market structure and no spread trading

The trading that takes place at Frankfurt Stock Exchange is regulated in accordance with the rules introduced either by the public legislator or the stock exchange itself. The capital market in Europe divides into EU-regulated markets and markets that are regulated by the stock exchanges themselves (regulated unofficial markets). At Frankfurter Wertpapierbörse companies have an option to list either in the EU-regulated market segments such as Official Market or Regulated Market, or they may choose to include their shares in trading on the Open Market (Regulated Unoffical Market),which is regulated by the Frankfurt Stock Exchange itself.

Within the frames of the three market segments Official Market, Regulated Market and Regulated Unofficial Market, there are three levels of transparency: Prime Standard, General Standard and Entry Standard.

The Official and Regulated Markets are segments based upon public law, namely the German Securities Trading Act (WpHG). The admission criteria and ongoing transparency requirements are prescribed by the European legislator. Companies in the Official or Regulated Market fulfill the highest European-wide transparency requirements and enjoy all advantages of a full exchange listing.

The Regulated Unofficial Market, which was repositioned as Open Market in October 2005, with its sub-segment Entry Standard, is a segment based on private law. Companies are included in trading at fewer formal requirements. Entry Standard affords young small and medium-sized companies cost-efficient access to the capital market. For this reason, it is particularly aimed at qualified and experienced investors.

Besides these market segments that are regulated by law, there are two smaller market segments for foreign shares from stock exchanges outside of Germany. International blue chips from Europe and the US can be traded in a special quality segment, Xetra Stars. Newex is the trading segment for central and eastern European securities on the Regulated Unofficial Market of the Frankfurt Stock Exchange.

Even though the trading runs in the electronic format it doesn’t mean absolute absence of live persons in the market. There are three groups participating in the trading: investors (the ‘end consumers’), issuers (‘the producers’) and traders (‘the intermediaries’).

The role of intermediaries on the Frankfurt trading floor is performed by lead brokers. They are responsible for matching demand and supply and fixing prices. In Xetra® trading, Designated Sponsors and Market Makers act as brokers and also provide binding bid and ask quotes. Additionally, banks hire traders to forward the orders of their customers to lead brokers or enter them into the electronic trading system.

These lead brokers attend to equities and other securities such as certificates or reverse convertibles:

•    Baader Wertpapierhandelsbank AG
•    Close Brothers Seydler AG
•    Concord Financial Intermediary GmbH
•    Equinet Securities AG
•    Hans Wilhelm Weber Wertpapierhandels GmbH
•    ICF Kursmakler AG
•    MWB Wertpapierhandelsbank AG
•    N.M. Fleischhacker AG
•    RENELL Wertpapierhandelsbank AG
•    RG Securities AG
•    Rolf Brauburger Kursmakler GmbH
•    Steubing AG
•    TRADEGATE AG
•    TriTrade GmbH
•    DBM Deutsche Börsenmakler GmbH
•    Peter Koch Xchange Brokers GmbH
•    Hellwig Wertpapierhandels GmbH
•    Walter Ludwig Wertpapierhandels GmbH

To be eligible to participate in the market a person has to be authorized. Private investors without a valid trader’s license are not authorized to trade directly on the floor. Authorized trading participants buy and sell securities on behalf of their clients. There are private and institutional investors and within each of these two groups, different types of investors and investment strategies can be found.

Issuers also need not present on the trading floor except the first day of admission to the Frankfurt Stock Exchange when  company makes its IPO which can be observed by the spectators live on the Internet.

Lead brokers can trade up to 160 shares of the DAX, MDAX, TecDAX and SDAX for private investors without paying the spread.

When an investor wants to buy a security one of the most urgent aspects he tries to clarify is the current price. In this regard, the up-to-date estimate might be of more importance to than the last price. There are two types of estimates: the bid and the ask estimate. Estimates are published by the lead brokers in Frankfurt floor trading; they are determined on the basis of the current market situation and under consideration of the respective reference market.

As we know, in most cases of exchange trading investors sell at the lower bid price and buy at the higher ask price. The difference between the two is called spread. The more actively a title is traded, the narrower is the spread. The narrower the spread, the more favorable is the price for both the buyer and the seller.

Previously, the maximum spread for private investors in DAX® titles was 0.3 percent; for MDAX® and TecDAX® titles it was 1 percent. For a DAX share with an exchange price of €50 this corresponds to 15 cent per share; for an MDAX or TecDAX share of the same value, this corresponds to 50 cents max.

But quite lately the situation changed and now the lead brokers execute private investors’ buy and sell orders at the median between the current bid and ask quote providing thus a zero spread in DAX titles for order volumes up to €10,000, in MDAX titles for orders up to €5,000 as well as in TecDAX and SDAX shares for orders up to €3,000.

The median between the bid and the ask quote is an indicative price. It is published in real-time on the website of Deutsche Börse. It represents the price at which the lead broker could execute a buy or sell order on the Frankfurt Stock Exchange at the given point in time.

Indices

The leading stock market index accepted in Germany is the DAX®. It belongs to the family of selection indices at the Börse Frankfurt which also includes the TecDAX®, MDAX® and SDAX®. The Deutsche Börse also calculates several other indices to provide valuable information for a wide variety of interests.

The Deutsche Börse calculates four selection indices with global importance: DAX®, MDAX®, TecDAX® and SDAX®. Additionally, the Deutsche Börse calculates sector indices for all companies listed under the Prime, General and Entry Standard.

All share indices are more comprehensive than selection indices, as they tend to reflect the performance of an entire market. Usually portfolio managers use all share indices as benchmarks.

The index family known as DAXplus® gives investors access to several investment strategies in a transparent, regulated and cost efficient environment.

The most popular international indices of the Deutsche Börse are the DJ Stoxx 50 and the DJ Euro Stoxx 50. These indices are possible through the cooperation with other European stock exchanges and the service provider Dow Jones.

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