How the stock exchange works

Darstellung des Börsensaals mit schwebenden Symbolen von Wertpapierarten

On television, journalists report daily from the floor of the Frankfurt Stock Exchange and inform about the development of share prices, the DAX® or general economic events. So far, so good. But what does a stock exchange do at all? And what are its tasks?
 

A modern marketplace for buyers and sellers

Basically, the stock exchange is a well-organized marketplace where buyers and sellers come together to trade securities. We know marketplaces from our everyday lives. Their basic principle hasn't changed much over the centuries: People meet to buy and sell all kinds of goods. Merchants offer their goods and buyers come to buy them. Supply and demand determine the price. This principle also determines today's everyday life at the stock exchange.

However, trading on the stock exchange used to take place face to face, on the trading floor. Today, trading transactions are carried out almost exclusively electronically. Shares and other securities hardly exist in physical form anymore. This modern, virtual marketplace has the advantage that it brings together numerous willing market participants from all over the world at once and enables a high trading volume, called liquidity. In addition, a marketplace organised by the exchange ensures that the prices for the products traded, in this case securities, are fair and transparent and that there are no misunderstandings between buyers and sellers.

By the way, the actual buyers and sellers of the securities have usually not been in direct contact with each other since time immemorial. This is done by intermediaries such as custodian banks, brokers and/or securities dealers. Which persons are involved depends on the respective marketplace. However, thanks to computer technology, private investors can also get very close to the stock market. For example, orders placed online by private investors are routed directly into the trading system by the custodian banks.

Fairness thanks to stock exchange law and market supervision


Transparency and equal treatment of all market participants is the supreme principle of exchange trading. It is therefore strictly regulated by the Stock Exchange Act and the Securities Trading Act. The public law mandate to operate a stock exchange is awarded by the federal states, i.e. the Hesse Ministry of Economics for the Frankfurt Stock Exchange. The exchange supervisory authority of the state supervises the operation. Important decisions are made by the Exchange Council, which is elected by the market participants. The admission of the securities and the traders is handled by the Exchange Management. Trading itself is supervised by the Trading Surveillance Office (HÜSt), which investors can contact directly with questions regarding the execution of their stock exchange transactions. At the highest level, the Federal Financial Supervisory Authority (BaFin) ensures that the markets in Germany function properly. The BaFin is also responsible for ensuring that companies comply with their disclosure obligations and monitors insider trading of persons with an information advantage.


In the case of the Frankfurt Stock Exchange, Deutsche Börse AG and Börse Frankfurt Zertifikate AG are the operators.Therefore Deutsche Börse itself does not trade , but rather organises trading. It provides the infrastructure, defines rules and monitors compliance.

The tasks of the stock exchange in an economy at a glance

  • Providing efficient, regulated and controlled trading venues
  • Bundling supply and demand and bringing them together
  • Ensuring the greatest possible transparency and equal treatment of investors
  • Publish market data, especially prices and sales figures
  • offer companies access to the capital market via securities for financing purposes

 

The various trading venues of Deutsche Börse

For buying and selling securities on the Frankfurt Stock Exchange (FWB®), you can choose between two trading venues: the fully electronic trading venue Xetra® and specialist trading on the trading floor of the Frankfurt Stock Exchange.

Xetra: The electronic trading platform

More than 90 percent of all stock trading in Germany today takes place via the electronic trading platform Xetra. Via Xetra, you can buy and sell most German and important international stocks as well as exchange traded funds and products - index funds, commodity securitisations, etc. - every trading day from 9 a.m. to 5.30 p.m. . In Xetra, buy and sell orders usually meet with a price idea in a central, open order book. In the order book, the orders face each other and the system automatically checks every buy and sell order for its executability. If orders match, the transactions are executed immediately. The open order book ensures the greatest possible degree of transparency for investors. 

Xetra is the reference market for the exchange trading of large German shares. No other stock exchange in the world achieves higher turnover in these securities at market prices. Those who trade here profit from the highest liquidity and fair prices. On the basis of Xetra prices, the German leading index DAX® is determined every second. The DAX is calculated from the prices of the 30 German companies with the strongest turnover and is the most widely regarded indicator for the current development of the German stock market situation. 

Floor trading: personal support by specialists at the Frankfurt Stock Exchange

Let us now move on to floor trading, which takes place in the main hall of the Frankfurt Stock Exchange. You are certainly familiar with the hall from the television reports mentioned at the beginning. At the Frankfurt Stock Exchange, private investors can buy and sell around 1.5 million securities of German and international issuers. This includes all German and many international stocks, funds, bonds as well as certificates and warrants. Here, employees of securities trading firms, so-called specialists, support trading and ensure corresponding liquidity by publishing offer prices and quantities. They orient themselves to the current market situation and try to keep the difference between buying and selling prices as small as possible. Investors receive fair prices, even in securities that are not traded very often. 

As a private investor, you cannot simply go directly to the stock exchange and trade. For this you need a securities account with a bank or broker. However, you can decide for yourself when placing your order: Either you place your order via Xetra and benefit from high liquidity and transparent prices, or you trade via the Frankfurt Stock Exchange with personal support from certified specialists. If you decide not to make use of services such as proffesional consultation and open your securities account with a cheaper direct bank, you may sometimes have the impression that you are directly active on the stock exchange. You may find your orders in the open Xetra order book or as an offer price from the specialists online - if the transaction was not executed immediately anyway.