Elektronische Handelssysteme in Europa und Entwicklungsmglichkeiten fr Russland

Electronic Trading Systems in Europe and development potentialities for Russia Workshop: Bank und Finanzbeziehungen in Europa und die Integration Russlands

Prof. Dr. Christoph Lattemann Chair for Corporate Governance and E-Commerce

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Agenda

1. Theoretical Background (Market Microstructure Theory) 2. Structure in Germany 3. Structure in Europe 4. Structure in Russia (Discussion)

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Impact of Liquidity and Degree of Automation on Efficiency Main goal of markets: Efficient resource allocation Measure of the markets efficiency: transaction and liquidity costs

Development of efficient market models and trading platforms

Theoretical Background Market Microstructure Theory

Transaction Costs
Criteria for Efficiency Evaluation Transparency Price Steadiness Information efficiency
Frequency Legal Bounderies Marktkonzentration Price finding mechanism

Liquidity Integrity Regional Concentration

Market Organization Orderbook Transparency

Factor for Efficiency

Effect Characteristics of the structure

= Effect = trade-off

Computerization

Folie 3 Picot et al. [1996]

Transaction Costs on Equity Markets

Liquidity

Computerization
(Transaction Costs)

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Eine Automatisierung der Informations-, Orderrouting, Abschluss- und Abwicklungsphase fhrt ohne Einschrnkungen zu einer effizienteren Organisation des Transaktionsprozess von Wertpapieren. Entsprechend ist die Automatisierung dieser Phasen ohne Einschrnkung erstrebenswert aus dem Gesichtspunkt der Effizienz.

The computerization of the Information-, Orderoruting-, Matching-, and Settlement-Phase leads to an efficient organization of the transactions process of security trading. Insofar, from the point of efficiency, it is desirable to computerize all processes.
Picot et al. 1996, Brsen im Wandel

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Agenda

1. Theoretical Background (Market Microstructure Theory) 2. Structure in Germany 3. Structure in Europe 4. Structure in Russia (Discussion)

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Structure in Germany

Bremen (Nasdaq Deutschland) Hannover (Commodity Exchange)

Hamburg & Hannover

Berlin

Dsseldorf
Market Share (Exchange traded equities) 98 %

Leipzig (Power Exchange)

Frankfurt Xetra Eurex Mnchen Stuttgart

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Exchange OTC Equities Bonds 55 % 10 % 45 % 90 %

The Strategy of the regional exchanges

... focus on niche markets ... and develop their own trading systems

Exchange
Hamburg and Hanover (BAG)

Specialization
1500 Bonds, > 250 Stock options Funds-X Turkish Stocks American Stocks > 800 Asian Stocks 10.000 international Stocks from more than 60 Countries 6000 US Stocks Services for small and medium sized Companies Options Japanese Stocks

Trading System

Munich Berlin

MAX-ONE (since May 2003) Nasdaq Europe (since March 2003)

Bremen Stuttgart Dsseldorf

Nasdad Europe (ab Mrz 2003) EUWAX (automatic Orderrouting via Xontro, Matching by Market Maker ) Quotrix (Autumn 2001)

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Trend toward Internalization in Germany

Nasdaq D

Quotrix

Max-One

Xetra Best

PIP/ Maxblue 2003

Referenzbr sen

Xetra

Launch Trading Hours Home Exchange Official Price Access by banks

2003 9-20 Uhr

Bremen/ Berlin

1998 8-23 Uhr Dsseldorf

2003 9-20 Uhr Munich

2002 9-20 Uhr Frankfurt

1997 9-20 Frankfurt

Deutsche Bank

Yes
HypoV.,Dres d., Comdirekt, Consors, Commerzba nk

Yes
S-Broker, Fimatex, 1822 direkt

Yes
Almost alle

No
Comdirekt, Commerzba nk,Hypverei nsb., Santander

No
Max Blue

Yes
all

Competition due to Internalization

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Quelle:: Faz-Sonntagszeitung, Nr. 11, 16.3.03 S. 45

Xetra provides a wide range of market models and functionalities on a single trading platform

Xetra Best

Retail Trading

Trading Model for High & Medium Liquids

Continuous trading interacting with Auctions

Xetra XXL Continuous auction Single/ Multiple auction Xetra OTC

Block Trading Warrant & Less Liquid Trading Less Liquid Trading OTC Trading/ Reporting

and therefore enables maximum flexibility for the market provider and the market participants
Source: German Exchange Folie 11

Deutsche Brse Group a Markets Company

Customers: issuers, investors, intermediaries, information vendors, exchanges Deutsche Brse Group
B2B Markets Third party technology services

CashTrading

Deutsche Brse Systems

Derivatives Trading

DAX
Information Products

Clearinghouse/Central Counterparty (CCP) Eurex Clearing

Settlement and Custody

Source: German Exchange Folie 12

Agenda

1. Theoretical Background (Market Microstructure Theory) 2. Structure in Germany 3. Structure in Europe 4. Structure in Russia (Discussion)

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Characteristics of the European Equity Market

High degree of fragmentation

Differences in market practices Language differences Cultural differences

Less developed equity culture as in the U.S.

Lower market capitalization

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The European Landscape of Exchanges

High

German SE (Floor) OM Group Euronext London SE

Trading System and sophsticated IT Competence

(OTC)
Swiss Exchange Milano SE Madrid SE

Athens SE Lissabon SE Irish SE

Low

Malta

Viennna SE

Low

High

Market Share

Source: Accenture 2000

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No common platform and no common architecture in Europe Derivative Exchange

Belgium Denmark Germany Finland France Greek UK Irland Italy Netherlands Norwegian Austria Portugal Sweden Spain Swiss OM Floor (later Connect) OM OM MEFF TRACS/QUOTE OM MEFF TRACS/QUOTE Eurex NSC - VF OM Eurex Eurex NSC-VF(evtl.Connect) Own Connect

Cash Exchange
NSC SAX Xetra HETI NSC Own SETS Xetra Own NSC Own Xetra Own SAX SIBE EBS
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There are 6 different trading platforms at the European derivative markets and 12 at the European Cash Exchanges

Drivers of Efficiency & Innovation Trends in Europe

Horizontal cross-border competition
Increasing competition across the entire Securities Industry

Cash equity markets (Dt. Brse; LSE) Derivatives markets (Eurex; Liffe) Cash bond markets (Eurex Bonds;BrokerTec;others)

Competition between market organizers and intermediaries Houses)

Disintermediation policy of Market Organizers (Exchanges, CDSs, Clearing

Internalization policy of Intermediaries (Brokers,Custodians)

Advanced technology and high innovation

Early introduction of electronic trading systems Development of central counterparty for equity trading (ECPP) as the new industry standard

Demutualization
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Electronic Communication Networks and Internalization as Competitors for Exchanges

Gary Putnam

South Western Sec

Technological development Reuters

JP Morgan Townsend

Instinet

Sal Smith Barney Heine Herzog Strike

Lehman

E-Trade CNBC Merrill Lynch

Archipelago

PaineWeber Bear Stearns

DLJ Goldman Sachs Schwab REDIBook SLK

Knight Trinkmark

Costumer needs
BRUT

Nasdaq

Fidelity Attain

TD Waterhouse All Tech

ASC Sunguard

Morgan stanley Dean Witter

Datek LVMH

ISLAND

NextTrade TradeBook

PIM

TA Associates

Platforms for Internalization (De-)Regulation by Broker/Dealer and Banks

Bloomberg

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The Development of ECNs in Europe

Traditional Exchange Service

Jiway

Type of Service Offered

X Knight MLX MarketEdge X XPrime Access

TLX

(X)Virt X

Complementary Specialists

Posit Cats OS XEOS Tradegate Tradecross E-Crossnet

Low Retail

Target Client Group

Institutional
Source: Accenture 2000

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Demutualization Change in the Governance Structure

listed for profit organizations

Euronext Deutsche Brse AG OM LSE Borsa Italiana

Not listed for profit organizations

Copenhagen SE Helsinki SE Stockholm SE LIFFE Deutsche Brse AG Borsa Italiana Soc. des Bourses Amsterdam SE Franaises
All Exchanges

(Nasdaq Inc.) London Metal Exchange

Membership corporation

1986

1992 1993

1995

1996

1997

1998

1999

2000

2001

2002

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Trend Toward Cooperation and Mergers Most projects were not successful in Europe
Failure of merger between LSE an German Stock Exchange (iX, September 2000) Failure of pan-European Exchange for young Companies (Easdaq, Brussels; Spring 2001) Failure of pan-European Market-Maker-Exchange Jiway, London, Autumn 2002) Failure of the Merger of the biggest European Settlement Institutions (Euroclear and Clearstream) (Spring 2002) Merger of Crest LCH successful Merger of Cedel German Kassenverein successful - Merger of Suffix-DTB successful
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3 Networks cover 75 % of the Settlement volume in Europe

Transaction volume in 2000 in Mio. 145 Assets in Mrd.
%share in Europa

Settlement institution

Operation Costs in Mrd.

(Operation Costs /Transactions)

Ownership Structure
83,33 % Euroclear 16,67 % Sicovam AG with over 1500 Stockholders 100% Deutsche Brse AG

Euroclear plc

7.424

31 %

Ca. 420 Mrd (EUR 2,9 each transaction) Ca. 420 (EUR 2,75) Ca. 140 (EUR 1,6)

Clearstream The Settlement Network

153

7.420

31 %

88

4.000

16 %

SIS und CrestCo AG with each over 100 stockholders

Rest of Europe (1999)

62,6

5.382

22 %
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The New Trend: Concept of Central Counterparty on Cash Markets in Europe

Reykjavik Kopenhagen Stockholm Oslo Norex (2004) London LSE (2001) virt-X (2002)

Central Counterparty is established for long time at derivative markets

Frankfurt Xetra (2003) FWB Parkett (2003)

At first at U.S. Cash Market (1977 NSCC) Now Proactive Initiatives for the introduction of CCP in Europa

Amsterdam Brssel Paris Euronext (seit 1990) Paris Brssel Amsterdam Mailand Borsa Italiana (2002)

CCP Introduced Introduction is planed

Quelle: Deutsche Brse 2003

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Agenda

1. Theoretical Background (Market Microstructure Theory) 2. Structure in Germany 3. Structure in Europe 4. Structure in Russia (Discussion)

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Market Capitalization

Marktkapitalisierung in Mrd. USD in 2001 New York Stock Exchange NASDAQ Tokyo Stock Exchange London Stock Exchange EURONEXT Deutsche Brse Swiss Exchange Toronto Stock Exchange Russia 10 247,0 2 517,5 2 504,5 2 060,0 1 692,7 993,1 596,3 556,6 37,2
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Russian Equity Market at the MICEX, Moskau Stock Exchange and RTS

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% July Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 97 98 98 99 99 00 00 01 01 02 02 MICEX RTS MSE

OTC Market is dominating the Stock Market

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Main Problems in Russia Discussion

Efficient Settlement Procedures No Central Depository Investors Behavior (2% - 3% of population are investing in shares) Legal Framework Consolidation of markets Solution:
Cooperation with European Exchanges, Depositories (Xetra, Euronext, Clearstream) ? Development of innovative Market Models (like RTS)

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Innovative Market Models by RTS Reuters

Clearing der GAZPROM Aktien

Bloomberg

Guarateed
RTS Plaza Trading System DCC

Trading System
(Transaktionen sind abgesichert durch Geld/Depots)

(elektronisches Handelssystem der Broker NAUFOR = NPO) DCCAbwicklungssystem

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400 Aktien 50 Anleihen

500 Wechsel 10 Derivate

The European Landscape of Exchanges (incl. Clearing & Settlement)

Clearing & S
DTCC

Cash Markets
Coredeal MTS Eurex Bonds
CCP project: LSE + LCH + CrestCo

Euro CCP

NASDAQ
NQLX project

Derivatives
CBOT
HK SydFE

Eurex Clearg.

NAS-E
NAS-D: BRE BER

Clearstream
MonteTitoli
(+ oth.nat.CSDs)

VIE XETRA IRE}

DUS MUC STU

HAM HAN

LCH CCP project SIS-Sega ClearNet Euroclear CrestCo

BAR BIL VAL

LON DEU ITA MAD

SWX

JSE
SGX ASX

Eurex
DEU SWX (HEX) MATIF MIF MEFF
LME IPE

SME
LAT-AM (LATIBEX)

virt-x
ATH
IST
BEL

ARCHIP/ PAC EX

euronext
LIFFE PAR BRU AMS LIS
ADX

RIG TAL MAL

Working Meetings

HEX

euronext
(PAR) (AMS) (BRU) LIS
VIL
NYSE TOR HK
+

CYP

Globex
MATIF MEFF CME MONTR BM&F SGX
STO OMLon
LEC

Indices
Stoxx:
DEU, SWX, DJ
(Eurex, ENXT-PAR)

BRA BUD LJU PRG WAR

GEM

FTSE:
LON, FT
(LIFFE, ENXT-AMS)

ZAG BUC SOF MAC UKR RUS

SRJ BjL MOL TIR

Norex: STO COP ICE OSL

MEX BOVISPA TOK ASX

OSL COP

OM Lon

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Source: Federation of European Securities Exchanges FESE (pozniak@fese.be)