You order the purchase or sale of a security from your customer advisor or on the Internet. Sooner or later, you will receive confirmation that the order has been credited to your securities account. So far you know the procedure. But what happens in between? What stages does the order for a share, exchange-traded fund or certificate take?
Start: Purchase or sale of a security is ordered
Which route your order takes is determined by the choice of trading place. If you enter Xetra, then a trader places the order in the fully electronic trading platform Xetra. If you choose Frankfurt, then your order will be placed in the Xetra Frankfurt specialist trading on the Frankfurt floor.
Route planning: Order add-ons determine the route of travel
How the order is executed depends on order supplements. These can relate to price, time, and type of execution. The wide range of order add-ons allows the execution of an order to be adapted to individual wishes and trading strategies.
Vehicle selection: Auctions and continuous trading
An order supplement can also be used to determine the trading phase in which the order is to be executed. A distinction is made between continuous trading and auctions.
In continuous trading on Xetra, during trading hours (9:00 a.m. to 5:30 p.m. each trading day), current prices are constantly determined and orders are executed as soon as a suitable counteroffer is available.
At the auctions, on the other hand, all existing purchase and sales orders are combined and compared. The price at which the largest volume traded occurs is the unit price. The order book is closed during an auction.
Up to three auctions take place on Xetra on each trading day. An opening and a closing auction, as well as an intraday auction at 13:00. The exact time of the intraday auctions that interrupt continuous trading varies from segment to segment.
Floor trading generally works according to the principle of a continuous auction, i.e. the specialists trigger an auction upon receipt of an executable order.
Itinerary: Non stop or rest in the order book
If the order enters the Xetra trading system during continuous trading and is not otherwise restricted by an order supplement, the system checks whether a suitable counteroffer exists. A so-called price-time priority applies. This means that orders are executed regardless of origin or size in the first priority after the price, in the second priority after the time of receipt.
If there is no suitable counteroffer, the order is entered in the order book. There the open buy and sell orders are listed by price. How long - and if at all - an order remains in the order book depends on possible additional orders. Unless otherwise specified, the order is automatically deleted after 90 days.
In floor trading, the orders are executed at the price at which the largest turnover can be achieved within the bid-ask spread or at which the smallest overhang exists. This is known as the modified most-execution principle. In the case of identical turnover at several limits, execution is carried out at the price at which the smallest overhang exists.
Treasurer: the central settlement agent
As soon as the system finds a suitable counterparty, the order is executed immediately and as far as possible. The bank participating in the trade where the buy or sell order was originally placed receives a confirmation of execution and informs its client accordingly.
The transaction data is forwarded to a central settlement agent - the clearing and settlement house. This institution handles the transfer of securities from and to securities accounts, possibly including payment transactions. Upon completion of a trading day, the clearing house informs its members of their transactions and the resulting receivables and payables. In addition to a licence, the members of a clearing house require a securities account and a cash clearing account with the clearing house. In some cases, the cash accounts are also managed by a state central bank. Whether this is the case depends in detail on which bank the private investor placed the order with and whether it is a domestic transaction.
The clearing house of Deutsche Börse AG is Clearstream Banking. The clearing house handles more than 500,000 transactions daily, in around 200,000 securities, on 39 markets. In its custody accounts, Clearstream holds shares, bonds and funds worth around 7.5 trillion euros. Most securities are no longer physically stored and transported, but are recorded as information in electronic storage media.
Once the transaction has been concluded, the actual "delivery" - the settlement - takes place. The securities are posted from the account of the clearing house to the securities account requested by the customer. At the same time, the purchase price is debited or credited from an account of the bank at the clearing house or directly at a state central bank. The transaction is concluded two trading days later. With this so-called settlement, the exchange of securities and cash equivalent is completed, the order at its destination.
More complicated: trading in foreign securities
For domestic trade, the process is still quite clear. Trading securities purchased abroad becomes more complicated. Other laws and tax regulations of the respective country must be taken into account. In addition, the transaction goes through different technical settlement systems. This usually results in higher costs and longer waiting times. If the journey of a domestic order resembles a leisurely weekend trip, the journey of a security quoted abroad can degenerate into a small odyssey, but investors do not notice anything about it.
© Juni 2019, Deutsche Börse AG