EXCHANGE SEGMENTS OF THE SECONDARY MARKET IN LUXEMBOURG

We talked in a previous article about:THE SEGMENTS OF THE SECONDARY MARKET IN 

THE GRAND DUCHY OF LUXEMBOURG

 Today we talk about: EXCHANGE SEGMENTS OF THE SECONDARY MARKET IN LUXEMBOURG

1.Trading in listed issues on the Luxembourg Bourse at the present time

In Luxembourg the Bourse has a monopoly in quoting and publishing the prices of securities. There is spot trading only. A price cannot be quoted unless at least ten units are bought and sold or the value of the transaction is at least

 Lfrs. 5.000.During the time the representatives of the member firms are assembled on the floor of the exchange, from 11 a.m. to 1 p.m., both collective and individual prices of any listed security may be agreed on and they provide the basis for official quotations.

Trading at the opening is most important. The opening price is basically a collective price (see Annex 2).

The bonds and stocks are called over consecutively. The member firms' representatives then announce whether they wish to buy or sell.

 The interested parties publicly negotiate the price at which all orders can be executed, or at least more than at other prices. On account of the low turnover in many securities it often happens that only two members make a bargain at this price or that only one member introduces matching orders.

 Even in such cases an opening price comes into existence. Each opening price is called out aloud before being quoted. Frequently there are only buyers or only sellers on the market, with the result that a bid or an ask is quoted.

After the opening price of a security has been established, the item may be called out again one or more times, as requested.. As a rule no collective bargains will then be made, but only individual contracts and these will then also be quoted - or,if no counterparty appears, only bid or ask will be published. A second call is rare; usually only an opening price arises. Here, too, orders may be crossed on the stock exchange involving only one member firm instead of two as in the normal case. The representative calls out his intention to cross. Other dealers may intervene and as a result normal bargains may arise. Partial participation by another dealer is also possible, particularly if the two orders of the crossing firm are for a different number of units. The crossing dealer must always justify the transaction to the quotation commissioner.

2. Ventes publiques On the Belgian model, the rules of the Luxembourg Bourse make provision for dealings in unlisted securities. Such business is nowhere near as important as it is in Belgium, however. Each year only a few "ventes publiques" are held, and those at irregular intervals. The application by a stock exchange member to auction unlisted, usually domestic, securities most often comes about in the course of the disposal of a deceased person's estate.

 In such cases the auction is conducted by a sheriff's officer on the floor of the stock exchange during exchange hours.

3.Dealings under the planned Eurex systemAs is made clear by Table F -1,it is mainly foreign -or more accurately, international - issues that are listed on the Luxembourg Bourse. These securities are usually traded in several countries, particularly where there are already links with the markets of other countries through the currency of denomination or through the issuer or the issuer's parent company. This generally makes geographical centralization of trading in these securities impossible. The traditional kind of stock exchange dealings in such securities will therefore be seen at the outset to be an unsatisfactory solution, since each dealer will want to follow the performance of a security on all sub-markets continually and will want to be in contact with such markets. This is less easily done from the floor of a traditional stock exchange than from offices of security-dealing firms.

Accordingly, telephone dealings are the dominant method of trading in such securities. 

A traditional stock exchange, although it can still contribute to procedural efficiency  in the information and decision making spheres through the listing and disclosure requirements and by regular publication of prices, can no longer fulfil its two primary tasks in the execution sphere, namely assembling all information about the state of the market for a given security and bringing potential contracting parties into contact with each other. The Luxembourg Bourse has clearly recognized this and has sought a solution which will allow it to continue to do justice to its primary functions in the execution sphere in respect to trading in international securities. The Bourse has come to the conclusion that the traditional concept of the assembly of dealers on the floor of the exchange must be abandoned and that today only an automated stock exchange can offer the maximum degree of procedural efficiency for dealings in international securities.

 For this reason the Luxembourg Bourse has been working on the creation of a computer-assisted trading system known as "EUREX" since 1973. 

The project is supported by 69 well known security-dealing firms in 13 European countries and in Japan. Trade via Eurex is scheduled to begin in1978.Trading through the Eurex system is to be open not only to Luxembourg stock exchange members but also to market makers and commission-guided security-dealing firms throughout Europe, but not to institutional investors.

Initially the market makers in London, Copenhagen, Amsterdam, Brussels, Dusseldorf, Frankfurt, Luxembourg, Paris, Zurich, Geneva, Milan and Rome will be linked with the central computer in Luxembourg. The other security-dealing firms will also be connected with this network. It is expected that 75 - 80% of the security-dealing firms handling international business will use the Eurex system. On account of differences in the financial standing of the participants, it will be possible at any time on a confidential basis -to exclude certain participants not acceptable as counterparties or to limit the volume of individual transactions with them.

Whilst the market makers are to be provided with visual display and input units and with a printer, the other security-dealing firms will be able to operate adequately with their telex equipment. As with Ariel, dealing will take place without voice contact. The Eure system is based on the assumption that there will be several market makers for each security. The system will execute orders through these market makers by two different techniques. The first will be applicable to orders for round lots, the second to orders for odd lots.  Only limit orders will be permitted. When a round-lot ordercomes up, all the market makers (except, of course, those who are undesired partners on  grounds  of lack of standing) will immediately be asked to  feed in their quotes  as the name and identification  data (currency of denomination, coupon rate, dates  of  coupon payment and maturity) of the security  ordered will appear on the upper part of the display  screen. 

If the order is an order to buy,for example,the

Computer will seek out the lowest ask from among the quotes fed in. The market maker who  is the  first to  feed  in the lowest ask secures the deal, provided that  the  limit permits  a bargain  to be made. On the middle section of his screen there will then appear,by way of confirmation, in addition to the name and identification 

data of the security, the transaction price  - in this example  it will be the same as the  ask  - the name of the contracting party  and the nature of the transaction  from  that party's point of view  (in this case  a purchase), and the quantity  traded. At the same time the system will print out confirmations for both parties. If the order is for more than a round lot or "standard quantity", the transaction will proceed very similarly to the execution of a normal order. The market maker with the most favourable price,with the lowest ask for example, first receives the same information as in the case of a confirmation. He then has an opportunity to revise his ask upwards if he so wishes. So long as he remains below the limit and below the average of the asks fed in by all market makers, he will not lose the order and the system will print out the confirmation. Otherwise the deal will be made for standard quantity only except if the order is for all or none. Remaining round lots will be treated as a new order.

Remaining odd lots and all-or-none orders, by contrast, will be subjected to the procedure for odd lots if the larger quantity premium of the market maker with the best ask exceeds the above-mentioned limits. In the case of an order to sell the procedure is the same, if the immediacy discount due to the larger quantity of the order produces a bid price that is below the limit or below the market makers

1. average bid price.

If several market makers, in response to one large

order,e.g. an order to buy, have fed in quotes with identical asks, each of them receives the above-mentioned information about the order. The market maker who thereupon raises his offer the least (or is the first to raise it the least) secures the deal, provided that he has not exceeded the limit or the average ask.

Otherwise the order must be divided up and/or the procedure for odd lots is applied. Odd-lot orders (and/or unexecuted large orders) are executed only after a round-lot order has prompted the market makers to enter quotes. The above-average

bids and the below-average asks of all market makers who did not succeed in participating in the business triggered off by the round-lot order are lowered to the average bid or raised to the average offer and applied to odd-lot orders automatically. All odd-lot selling and buying orders received are then executed and confirmed automatically at this average bid or average ask provided their limits allow it.

In the event that there should be only one market maker for a given security, the procedure can be basically similar to the method just described except that in place of adjustment to the averages there will be an odd-lot differential  (premium or discount for less than standard quantities).

 In addition, a solution to the problem of the maximum spread will have to be found. Further, it is conceivable that there might be no market maker in a given security. In that case the orders would simply be stored until a matching order was received.. Some participants could also declare themselves willing to enter matching orders in respect of certain securities if asked to do so.

The matching order to sell with the lowest limit or the matching order to buy with the highest limit would then be successful and its limit would determine the price.

The annual cost of the Eure system is estimated at $ 2 to 3 million.

On the basis of 1.500 transactions per day the system would pay for itself on a levy of $ 7 to $ 8 per transaction,which could be apportioned between buyer and seller. Against this levy one would have to set the participants' savings on telephone and telex charges which would have arisen on dealings without Eure and also possible savings on staff costs.

Eure will prepare its data on transactions in such a way that the data will be able to serve as the basis for clearing operations via Cede  or Euro clear; Eure will itself communicate such data to those systems.

 These two clearing systems have already been handling the bulk of the Luxembourg Bourse's bond transactions for several years, whereas share business has been cleared by the Bourse's own clearing and settlement departments.