An integrated business model covering the initial public offering (IPO) market, a cash and a derivatives market, as well as clearing and settlement processes is a key success factor not only for the owners and managers of an exchange organisation, but also for their customers. Nothing demonstrates this better than the recent conversion of the London Stock Exchange to such a model, as witnessed by its merger with Borsa Italiana. As recent announcements made by Brazilian exchanges show, this model is not just popular in Europe. Its global appeal is far-reaching.
Be this as it may, for the customers of Deutsche Börse, the integrated model has paid off: they profit from a one-stop shop for more than 300,000 instruments, super-fast transactions on a very stable system, and very high liquidity. Our mission is improved market efficiency by delivering lower total transaction cost for investors.
There is no doubt that liquidity is a central precondition for the efficient execution of securities orders. With Xetra, Deutsche Börse offers cost-efficient trading on a liquid market. In order to continue to secure these benefits in the future, Deutsche Börse is continually improving the technical infrastructure and optimising the functionalities of the trading system. While some new entrants in the market solely focus for a small product set on micro management of explicit costs, such as fees for trading, clearing and settlement, investors who buy or sell securities pay the bulk of their trading costs in implicit transaction costs. These implicit costs depend on the order book situation at the point in time at which the order is executed.
Together with its transparent cost structure, Deutsche Börse provides the groundwork required to ensure that trading participants continue to bring additional liquidity onto the Xetra trading platform. In principle, the more liquid a marketplace (the more buy and sell orders are available) the lower the implicit transaction costs. According to the Xetra Liquidity Measure (XLM), liquidity on Deutsche Börse’s electronic regulated market has improved by two-thirds since 2002 – thus, substantially reducing total transaction cost for investors. Implicit transaction costs account for about 80% to 90% of total transaction costs and are therefore the most important parameter for cost analysis. As the leading pool of liquidity for many European benchmark equities and exchange traded funds (ETFs), Xetra offers investors superior service and lowest overall transaction costs.
The fully electronic Xetra trading system sets global standards due to its reliability, high availability and speed. The client server architecture enables optimum system scalability – further trading participants can be connected quickly and easily. Xetra can be integrated into the client’s systems and processes using a special open interface. Due to its latest state-of-the-art technology, Xetra offers lowest latency with round trip times as low as two milliseconds which makes Xetra the platform of choice for the implementation of algorithmic trading strategies.
Two market models in place
Improving efficiency in trading also means selecting the right market model for trading. With Xetra and floor trading, the Frankfurt Stock Exchange has already been offering market participants trading on two successful regulated markets for some time. While the open limit order book of Xetra offers highly efficient trading for highly liquid benchmark products such as DAX shares and ETFs, the specialist-based floor trading model caters to the needs of small and mid caps as well as all other less liquid instruments. Both platforms are among the most liquid trading venues in Europe, making them ideally suited for investment firms that want to meet the best execution requirements set out in the Markets in Financial Instruments Directive (MiFID) by passing on their client orders to these venues.
But nothing is taken for granted in the securities business. The pace of development and innovation in this industry is tremendous. So far, 260 trading members in 19 countries can trade more than 10,000 equities on Xetra. This proven success of Xetra, however, is today only a starting point for enormous imminent expansion.
Xetra platform expansion
With Xetra Version 9.0, scheduled for launch at the end of April, Deutsche Börse will introduce the most significant platform expansion since Xetra was started in 1997. As a first step, about 280,000 structured products will become tradable on the electronic trading system. This will increase Xetra’s range of tradable instruments to about 300,000 securities of different types, more than 10 times those of its nearest current competitor.
Naturally, given the timing of the introduction, these will comply with rigorous MiFID requirements. For the end-clients, both private and institutional investors, this innovation offers one-stop trading for a range of asset classes on a single platform. Due to the broad range of securities and the proven low latency and attractive cost structures of Xetra, its competitiveness in a rapidly changing securities industry landscape is assured. For issuers, particularly of fast-growing structured products, Xetra 9.0 will be an important development. Effectively it will create pan-European distribution in a MiFID-compliant standardised environment for post-trade services for all asset classes.
In addition, the attractiveness of Deutsche Börse as a listing platform for small and mid cap companies increases due to the provision of a highly efficient liquidity provision model with a pan-European distribution. This innovation adds to the existing positioning of Frankfurt as one of the leading listing venues in the world. A recent international study on listings costs undertaken by financial economists at the European Business School and Technische Universität Munich concluded that Deutsche Börse offers companies the lowest capital costs among the world’s leading stock exchanges. Deutsche Börse offers the lowest capital costs in all three segments – prime, general and entry standard – for both IPOs and for ongoing listings. According to the study, liquidity on the Frankfurt Stock Exchange is also higher than at the other trading venues.
Advantage Deutsche Börse
The study compares the terms and conditions that apply to a listing with Deutsche Börse with those on Euronext, the Hong Kong Stock Exchange, the London Stock Exchange, Nasdaq and the New York Stock Exchange. More than 2200 IPOs were examined over the period from January 1999 to March 2007. With an overall score of 2.0, Deutsche Börse’s prime standard and general standard come in first compared to the other main markets, followed by Hong Kong’s Main Board (2.9), the NYSE Large Caps (3.0), Euronext’s Eurolist (3.1), the LSE’s Main Market (3.4) and Nasdaq’s Large Caps (3.5).
As far as the alternative markets are concerned, the entry standard is in pole position with an overall score of 1.9. It is followed by the NYSE Small Caps with a score of 2.6, Euronext’s Alternext (2.8), the Nasdaq Small Caps (3.0), the LSE’s AIM (3.4) and the Hong Kong Growth Enterprise Market (GEM) (3.5).
Zero-trade ratio
The zero-trade ratio (ZTR) was also examined in the study. This parameter shows the ratio of days without trading in a particular share to the trading days. A low ZTR means that trading activity is high. The study shows that Frankfurt has the highest liquidity in an international comparison, both among the main markets and in the alternative segment. The ZTR in the prime standard and the general standard, as well as in the entry standard, comes in at 1.39%. By means of comparison, London’s Main Market scores 9.15% and its AIM 39.89%, while Hong Kong’s GEM also returns a far higher ratio with 33.42%.
Covering the whole value chain from listing and trading through clearing and settlement to custody, Deutsche Börse has continuously improved the efficiency of processes and has increased the liquidity of its markets for the benefit of all customer groups: issuers, trading members, institutional and private investors.
For the future, Deutsche Börse believes that only those trading platforms that have the ability to deliver a broad range of trading and post-trading functionalities across all asset classes and at different levels of liquidity, while ensuring adherence to the highest standard of pre-and post-trade transparency, will be able to sustainably add value to their customers. In this respect, Deutsche Börse as a vertically integrated exchange organisation has a unique selling proposition to continue to offer superior services to its customers.
