"Security is embedded into the DNA of our markets"

status - Security in trading is a European virtue

Resilient markets based on a clear design

All areas of our lives are getting faster. By switching to electronic trading systems, Deutsche Börse took a key step towards automated trading – almost two decades ago.

"Some critical observers of securities trading are calling for an artificial slowdown of markets – now that is precisely the opposite of what state-of-the-art technology intends," says Miroslav Budimir, Head of Segment Management, who is responsible for Deutsche Börse Group's cash market structure. "It is unlikely that such demands will actually materialise." In fact, mechanisms designed to artificially slow down markets already exist – but they are only used in extreme situations: "These mechanisms exclusively serve to maintain fair, transparent and liquid trading," Budimir adds.

Miroslav Budimir

Head of Segment Management, Deutsche Börse AG

The Senior Vice President is head of the Segment Management unit in the Cash Market area of Deutsche Börse Group; he has been working for the Group since 2002.

From carrier pigeons to glass-fibre cables

In trading, time has always been money. Up until the 19th century, carrier pigeons were launched from ships sailing from Europe as soon as the US coast was within reach. They brought the latest news long before ship and crew reached the harbour. This meant that those traders who received the news first were able to adapt their trading patterns and pricing policy accordingly. "Whoever was able to skilfully exploit the benefit of being a few hours ahead had an advantage," says Budimir. Nowadays, it's not about hours, but about milliseconds – no carrier pigeons, and no more telephone calls either. Even open outcry on the trading floor would be far too slow; it takes glass-fibre lines to submit orders: "Speed has always been a principle of free trade."


Trading

Exchange trading is the best proxy for a 'perfect' market, mainly because exchanges match supply and demand – directly and free of distortion. Deutsche Börse Group operates regulated markets for equities, bonds, and numerous other products using its Xetra® electronic trading system. The Group also facilitates trading of derivatives – contracts derived from other assets or reference values (including equities, indices, European and US bonds, foreign exchange or commodities), which are traded on the various Eurex trading platforms based on the T7® market architecture. This also encompasses carbon dioxide (CO2) emissions trading at the European Energy Exchange. Based on free decisions to buy or sell, fair and transparent prices – which, for example in the case of equities, reflect the future potential of companies – are determined across all regulated trading segments.

Trading is a business area of Deutsche Börse Group.

It's about plausibility

Whilst trading participants are quick to agree upon the importance of speed, as far as security is concerned, European markets have embarked upon a different route than those in the US, for example: "We have embedded mandatory security features into the DNA of our markets," explains Budimir. The starting point is plausibility checks, even prior to clients placing their orders into the system. "This is a targeted measure to prevent so-called 'fat finger' errors," says Budimir. "For instance, where a trader would normally buy 1,000 shares at a price of 10 euros, but places an order for 10 shares of the same company at a price of 1,000 euros, the system will detect that something must be wrong."

The mechanism built into Deutsche Börse's systems is called 'volatility interruption' – a very effective protection against a phenomenon that made headlines in the US: the so-called 'flash crash'. Using pre-defined price ranges ('corridors'), the volatility interruption mechanism is an electronic plausibility check of the next price that is going to occur. If that price is outside one of the corridors, continuous trading will be interrupted for a short period of time; the market will be informed about this situation. Market participants are thus given time to review their orders, and to adjust (or delete) them in order to adapt to the new situation. Continuous trading resumes after a volatility interruption.


Key features of T7® and Xetra®

Key features of the T7® derivatives trading platform:
  • optimised processing and enhanced reporting
  • extended Calendar Spread functionality (calendar spreads support the trading of differences between different options [and futures] contracts on the same underlying instrument, but with different contract months)
  • markedly faster listing of new products and introduction of new functional features
  • more flexible timelines for implementing software upgrades
Key features of the Xetra® Release 16 trading platform:
  • fast trading of large-volume orders, without negative market impact (Volume Discovery Order)
  • MiFID II-compliant solutions
  • optimum execution of large ETF orders through interaction with the entire order book (Designated Sponsor Quote Request)
  • protection against unwanted order execution against the participant's own orders (Self Match Prevention)
To directly contact the Eurex Exchange and Xetra teams:
technology.roadmap@eurexchange.com
xetra@deutsche-boerse.com

Static and dynamic price corridors

Volatilitätskorridor

"We use two different corridors for the purpose of volatility interruptions: the dynamic price corridor is based on the last price determined; it is designed to capture and prevent abrupt price changes," Budimir adds. "The static price corridor is wider – and hence more stable – than the dynamic one. We use the static corridor to detect a series of small, successive price changes which, taken together, would constitute a more extensive price movement – a 'flash crash', for example." This means that where a trading pattern would gradually shift the dynamic price corridor – and would thus neutralise its check function – the static corridor would nonetheless trigger a volatility interruption. Budimir adds: "Continuous trading would also be interrupted in this scenario. We have also taken precautions for cases where the price continues to diverge strongly from the preceding price level, even after a volatility interruption. In this case, our third security feature will be triggered: an extended volatility interruption, where a qualified employee of Deutsche Börse checks for any news and corresponding order book situation that would justify such an unusual price movement. The employee’s decision when to resume trading is thus based on regulations passed by the management as well as personal expertise and experience.”

Transparency as a matter of responsibility

Budimir stresses the importance of the underlying principle: after all, even extreme price fluctuations may be justified in specific cases: "Of course, new facts emerging about a company, or other news, may provide a justification for a price divergence," Budimir explains. "All we want to avoid is sudden, abrupt spikes – not strong price fluctuations per se. After all, as a market operator, we are not in a position to assess what price is appropriate for a given share traded on our markets. This assessment takes place through interaction between buyers and sellers – by way of their placing orders on our market – and the resulting price discovery process. We support this process by setting the rules for such interaction – rules that apply for all market participants, and which we make transparent. This strengthens the trust of market participants in the price discovery process, and hence, in trading on markets organised by Deutsche Börse. You could say that we define the grammar, not the specific content. Our clients appreciate the robustness of our markets, as demonstrated by technical availability and reliability, but also in terms of fast, fair and transparent trading," Budimir states.


Clearing

Clearing is used to net claims and liabilities relating to financial instruments to each other. Deutsche Börse Group's clearing houses – Eurex Clearing AG and European Commodity Clearing AG – act as central counterparties: as buyer to each seller, and as seller to each buyer. Market participants pledge collateral that allows management of the risk exposure from trading. The clearing function is akin to insuring market participants against the default of a contractual counterparty.

Moreover, centralised clearing for off-exchange (over-the-counter – "OTC") trades is gaining importance, due to financial markets regulation but also reflecting the security features. Deutsche Börse Group offers an efficient clearing platform for all types of trading activities; the Group continuously enhances and expands its services offer in this field. Most recently, Deutsche Börse introduced a mechanism that allows the execution and settlement of large orders without burdening the market (i.e. without price distortions), and in line with regulatory requirements. Deutsche Börse thus lives up to its responsibility of facilitating regulated trading with a maximum of service quality and efficiency – making it as attractive as possible.

Clearing is a business area of Deutsche Börse Group..