Deutsche Borse wants to promote competition between lead brokers (Skontrofehrer) at the Frankfurt Stock Exchange, in order to further improve the quality of retail trading.
The centerpiece of the plan is the allocation of individual order books (Skontren) to currently active lead brokers for stocks traded on the official and regulated markets, based on their contribution to overall order book turnover and performance, starting July 01, 2005. Furthermore, the allocation of order books in Frankfurt, unlike at other stock exchanges, is also open to new lead brokers. Deutsche Brse says that this procedure will ensure that the quality of floor trading in Frankfurt benefits from intensified competition between performance-oriented lead brokers. The benefits for investors at the Frankfurt Stock Exchange include better and persistently reliable pricing and service quality. Deutsche Brse conceived the allocation criteria together with the market participants; they are subject to the approval of the Exchange Council, which meets on January 20.
“We are making use of the possibilities made available to stock exchanges by the new Financial Market Promotion Act as of July 01, 2005, in order to further raise the quality of order book management as well as to attract and promote new lead brokers with high standards of quality for the Frankfurt Stock Exchange”, says Rudolf Ferscha, Chairman of the Management Board of the Frankfurt Stock Exchange (Frankfurter Wertpapierbrse, FWB), and member of the Executive Board of Deutsche Brse AG responsible for Trading and Clearing Services. In the future, continued Ferscha, the FWB will reallocate individual order books to lead brokers every 18 months based on quality criteria, reserving a further nine percent of order book turnover for allocation to new lead brokers each time. In addition to quality criteria, Ferscha mentioned plans to incorporate market share gains and losses of the individual lead brokers into the order book allocation mechanisms in the future. This, he says, will allow Deutsche Brse to intensify competition between the lead brokers at the Frankfurt Stock Exchange, thus improving the performance of floor trading and strengthening the company’s lead with respect to quality and liquidity in retail trading as well.
This will be the first time that order books are not allocated for individual stocks, but for order book groups, sorted by sector and country. This is designed both to promote the building over time of order book management with specialized competencies, which ensures high performance in floor trading, and to allocate economically sensible batch sizes, offering even new lead brokers an effective economic incentive.
“We are also interested in attracting international market participants, who can contribute their experience from similar specialist roles at other market places, to become lead brokers for our market in the future”, says Rudolph Ferscha.
The percentage of order book turnover as an allocation criterion for currently active lead brokers takes into account the experience gathered thus far in order book management, and ensures a persistently high level of quality in Frankfurt. The performance of the lead brokers will be constantly monitored, based on a performance measurement, and used as a further criterion for the allocation of individual order books.
The performance measurement for floor trading evaluates the quote quality based on four criteria, and sets forth three additional criteria for the quality of order execution. Quote criteria are early quote as from the beginning of trading at 9 a.m., quote presence until the end of trading at 8 p.m., as well as quote width with maximum spreads (the difference between bid and ask prices), and minimum quote volume. The three criteria for order execution are maximum execution time, execution within the quotes, and the avoidance of partial executions. The composition of these criteria will be regularly reviewed by Deutsche Brse and adjusted where necessary to reflect market developments or technological advancements. The extended performance measurement begins on February 1; evaluation of changes in market share is scheduled to start as of July 1.
The management of the FWB (Frankfurt Stock Exchange) plans to include up to three new strong-performing lead brokers at the reallocation of individual order books every 18 months. These new lead brokers will each be allocated order book groups which represent three percent of the overall order book turnover at the FWB. This will serve to promote further competition between lead brokers at the Frankfurt Stock Exchange and provide new lead brokers with the ability to perform high-quality order book management from the very start.