market architecture of selected stock exchanges in ... - Gilles Daniel

MARKET ARCHITECTURE OF SELECTED STOCKEXCHANGES IN EMERGING MARKETSDIPLOMARBEITzur Erlangung des akademischen Gradeseines Magistersder Sozial- und Wirtschaftswissenschafteneingereicht bei HerrnO. Univ.-Prof.Dr. Klaus SCHREDELSEKERInstitut für Banken und FinanzenFakultät für Betriebswirtschaftder Leopold-Franzens-Universität InnsbruckvonJohann SCHMIDBAUERInnsbruck, März 2006

To my parents for their supportthroughout my studies

ITABLE OF CONTENTSList of Figures ........................................................................................................... IIIList of Tables ............................................................................................................IVList of Abbreviations ................................................................................................VI1 INTRODUCTION ......................................................................................................................11.1 MOTIVATION AND OBJECTIVE OF THE THESIS ..................................................................... 11.2 COURSE OF EXPLORATION................................................................................................... 52 PRELIMINARY CONSIDERATIONS....................................................................................62.1 THE STOCK EXCHANGE IN GENERAL................................................................................... 62.2 THE SELECTED STOCK EXCHANGES..................................................................................... 72.2.1 The Johannesburg Stock Exchange................................................................................ 72.2.2 The National Stock Exchange of India........................................................................... 92.2.3 The São Paulo Stock Exchange.................................................................................... 112.2.4 The Shanghai Stock Exchange ..................................................................................... 142.2.5 The Istanbul Stock Exchange ....................................................................................... 162.2.6 The Warsaw Stock Exchange ....................................................................................... 182.2.7 The Dubai International Financial Exchange.............................................................. 202.3 ORGANIZATIONAL STRUCTURE.......................................................................................... 212.4 MARKET STATISTICS ......................................................................................................... 212.5 EXCHANGE RATES............................................................................................................. 233 RULES AND MARKET MECHANISMS .............................................................................243.1 MARKET PARTICIPANTS .................................................................................................... 243.1.1 Customers .................................................................................................................... 243.1.2 Brokers......................................................................................................................... 243.1.3 Dealers......................................................................................................................... 253.1.4 Market Makers ............................................................................................................. 253.2 OPENING HOURS AND TRADING DAYS .............................................................................. 263.3 TYPES OF MARKET STRUCTURE......................................................................................... 263.3.1 Direct Search Markets ................................................................................................. 26

II3.3.2 Brokered Markets......................................................................................................... 273.3.3 Dealer Markets/ Quote-Driven Markets ...................................................................... 273.3.4 Auction Markets/ Order-Driven Markets ..................................................................... 273.3.5 Hybrid Market.............................................................................................................. 283.4 PRICE DISCOVERY ............................................................................................................. 293.4.1 Call Auction ................................................................................................................. 293.4.2 Continuous Auction...................................................................................................... 303.4.3 Mixed Systems .............................................................................................................. 303.5 ELECTRONIC VS. FLOOR TRADING..................................................................................... 313.6 ORDERS AND ORDER BOOKS ............................................................................................. 343.6.1 Types of Orders............................................................................................................ 343.6.2 Order Routing .............................................................................................................. 373.6.3 Order Book................................................................................................................... 383.7 TRADING INTERRUPTIONS AND MARKET CLOSURES ......................................................... 414 RULES AND MARKET MECHANISM ON THE SELECTED STOCK EXCHANGES 454.1 THE JOHANNESBURG STOCK EXCHANGE........................................................................... 454.2 THE NATIONAL STOCK EXCHANGE OF INDIA..................................................................... 564.3 THE SÃO PAULO STOCK EXCHANGE.................................................................................. 604.4 THE SHANGHAI STOCK EXCHANGE ................................................................................... 684.5 THE ISTANBUL STOCK EXCHANGE .................................................................................... 724.6 THE WARSAW STOCK EXCHANGE ..................................................................................... 774.7 THE DUBAI INTERNATIONAL FINANCIAL EXCHANGE ........................................................ 855 CONCLUSION.........................................................................................................................906 APPENDIX ...............................................................................................................................937 REFERENCES .........................................................................................................................96

IIIList of Figures 1Figure 1: Equity Market Capitalization as a Percentage of National GNP.................. 2Figure 2: World Equity Market Capitalization and Emerging Market Share.............. 3Figure 3: Market Capitalization as a Percentage of GNP vs. GNP Per Capita............ 4Figure 4: Latin American Exchanges – Traded Value in 09/05 ................................ 11Figure 5: Participation of the electronic trading (as percentage of total) .................. 12Figure 6: The Istanbul Stock Exchange Markets....................................................... 16Figure 7: Structure of the Polish Capital Market....................................................... 18Figure 8: The Global Shift from Floor Trading to Electronic Trading...................... 33Figure 9: Order Routing............................................................................................. 38Figure 10: Order Book in a Quote-Driven Market .................................................... 39Figure 11: Order Book in an Order-Driven Market................................................... 40Figure 12: JSE Market Segments............................................................................... 47Figure 13: Trading Phases of the JSE........................................................................ 50Figure 14: Volatility Bands at the JSE....................................................................... 54Figure 15: Trading Phases of the NSE....................................................................... 58Figure 16: Trading Phases at the BOVESPA ............................................................ 63Figure 17: Trading Phases at the SSE........................................................................ 70Figure 18: Trading Phases at the ISE......................................................................... 75Figure 19: Trading Phases of the Continuous Trading System at the WSE .............. 81Figure 20: Trading Phases of the Single-price Auction System at the WSE............. 82Figure 21: Trading Phases at the DIFX ..................................................................... 88

IVList of Tables 1Table 1: Johannesburg Stock Exchange Statistics....................................................... 8Table 2: National Stock Exchange of India Statistics................................................ 10Table 3: São Paulo Stock Exchange Statistics........................................................... 13Table 4: Shanghai Stock Exchange Statistics ............................................................ 15Table 5: Istanbul Stock Exchange Statistics .............................................................. 17Table 6: Warsaw Stock Exchange Statistics.............................................................. 19Table 7: Synoptical Table: Organizational Structures ............................................... 21Table 8: Market Statistics of the selected Stock Exchanges 2005............................. 21Table 9: Domestic Market Capitalization and Total Value of Share Trading of theselected Stock Exchanges 2005 ......................................................................... 22Table 10: Market Data Comparison: Emerging Stock Markets and the largest StockExchanges .......................................................................................................... 22Table 11: Average Exchange Rates ........................................................................... 23Table 12: Key Institutional Differences between Floor and Electronic Trading....... 31Table 13: Order Types – Execution Conditions (general) ......................................... 34Table 14: Order Types – Validity Constraint (general)............................................. 34Table 15: Order Handling in Call vs. Continuous Markets ....................................... 37Table 16: Market Participants of the JSE .................................................................. 45Table 17: Order types at the JSE................................................................................ 48Table 18: Opening Hours of the JSE ......................................................................... 50Table 19: Trading Period Time Description JSE....................................................... 50Table 20: Auction Algorithm Principles of the JSE .................................................. 52Table 21: Maximum Order Sizes at the JSE.............................................................. 53Table 22: Volatility Bands of the specific Market Segments at the JSE ................... 54Table 23: Table: Market Participants of the NSE...................................................... 56Table 24: Market Types and Order Books at the NSE .............................................. 57Table 25: Trading Period Time Description NSE...................................................... 58Table 26: Variation Limits at the NSE ...................................................................... 59Table 27: Market Participants of BOVESPA ............................................................ 60Table 28: Order and Offer Types at BOVESPA........................................................ 61Table 29: Opening Hours of BOVESPA ................................................................... 63Table 30: Trading Period Time Description BOVESPA........................................... 63Table 31: Trading Types on BOVESPA.................................................................... 64Table 32: Price Discovery in the Auction Phase at BOVESPA ................................ 65

VTable 33: Criteria for Auction Extension at BOVESPA ........................................... 66Table 34: Discretionary Trading Halt Statistics Reported by BOVESPA................. 67Table 35: Opening Hours of the SSE......................................................................... 70Table 36: Trading Period Time Description SSE ...................................................... 70Table 37: Stock Markets of the ISE........................................................................... 72Table 38: Market Participants of the ISE................................................................... 73Table 39: Opening Hours of the ISE.......................................................................... 75Table 40: Trading Period Time Description ISE ....................................................... 75Table 41: Discretionary Trading Halt Statistics Reported by the ISE....................... 76Table 42: Orders without Price Limit at the WSE..................................................... 78Table 43: Orders with a Price Limit at the WSE ....................................................... 79Table 44: Order Specifications at the WSE ............................................................... 80Table 45: Opening Hours of the WSE ....................................................................... 80Table 46: Continuous Trading Period Description WSE........................................... 81Table 47: Single-price Auction Trading Period Description WSE............................ 82Table 48: Price Variation Limits at the WSE ............................................................ 83Table 49: Discretionary Trading Halt Statistics Reported by the ISE....................... 84Table 50: Market Participants at the DIFX................................................................ 85Table 51: Execution Constraints at the DIFX............................................................ 86Table 52: Opening Hours of the DIFX ...................................................................... 88Table 53: Trading Period Time Description DIFX.................................................... 88Table 54: Tick Sizes for Group 02 and 10 at the DIFX............................................. 89Table 55: Table: Summary Comparison of Trading Halt Frequency ........................ 90Table 56: Synoptical Table of Market Mechanisms of the selected Stock Exchanges............................................................................................................................ 92

VIList of Abbreviations 1BOVESPACSFBCSRCCVMDFSADIFCDIFXECNETFFESEFIBVGMTGNPHSBCIMFIOSCOISEISINJETJSENASDAQNEATNMSNSENSXNYSEOECLOBSETSSSEUBSVWAPWARSETWFEWSEBolsa de Valores de São Paulo (São Paulo Stock Exchange)Credit Suisse First BostonChina Securities Regulatory CommissionComissão de Valores Mobiliários (Brazilian Securities and Exchange Commission)Dubai Financial Services AuthorityDubai International Financial CentreDubai International Financial ExchangeElectronic Communication NetworkExchange Traded FundFederation of European Securities ExchangesInternational Federation of Stock ExchangesGreenwich Mean TimeGross National ProductHong Kong and Shanghai Banking CorporationInternational Monetary FundInternational Organization of Securities CommissionsIstanbul Stock ExchangeInternational Securities Identification NumberJohannesburg Equities TradingJohannesburg Stock ExchangeNational Association of Securities Dealers Automated QuotationsNational Exchange for Automated TradingNormal Market SizeNational Stock Exchange of IndiaNamibian Stock ExchangeNew York Stock ExchangeOpen Electronic Consolidated Limit Order BookStock exchange Electronic Trading SystemShanghai Stock ExchangeUnited Bank of SwitzerlandVolume Weighted Average PriceWarsaw Stock Exchange TradingWorld Federation of ExchangesWarsaw Stock Exchange

11 Introduction1.1 Motivation and Objective of the ThesisDuring the last quarter century, exchange market and banking crises have newlyaroused interest in the regulation and supervision of financial markets. Given thattheir quality depends on rules determining the organization and regulation of thetrading process and the design of market structure, this has become subject to a newarea of research: the market microstructure theory.Market microstructure concentrates on the design of the market, on organizationaland regulatory features of the market settings and their impact on the price discoveryprocess, liquidity, information asymmetry, and volatility. Furthermore, it analyzesparticipants and their ability to observe information and use for making purchase andsale.The purpose of this paper, unlike market microstructure theory, is not to highlight theliquidity of an exchange and the use of information in the actual trading but ratherthe structural rules and their trading process on the stock exchange. However, sincethe theory emphasizes those issues, too, this study incorporates some of its keyfactors. The so-called market architecture designates the full set of rules andregulations governing the exchanges and is of utmost importance to get a detailedcomparison of stock exchanges. To emphasize the significance of market regulation,Coase states that “free markets require considerable internal infrastructure and selfregulationto function efficiently with minimal transaction costs” (Goodhart 1998,p.3). However, free financial markets may not have the same level of regulation andthrough their macroeconomic environment they may also differ in depth, liquidityand volatility. This becomes obvious considering developed and emerging financialmarkets.Financial markets in emerging countries are financially weak in comparison with

2those in the developed world. While the latter all have an equity marketplace, only81 out of 155 emerging markets have equity markets, which are “small relative totheir economies with market capitalization at only 30-40% of GNP, as compared to70-80% of GNP in the developed markets” (Levich 2001, p.7) (see Figure 1).Figure 1: Equity Market Capitalization as a Percentage of National GNPSource: Levich (2001)However, the emerging equity markets 1 have grown significantly. Figure 2 showsthat within 20 years, the world equity market capitalization has grown from under$3,0 trillion in 1980 to over $36 trillion in 1999, the share of emerging markets hasgrown from around 3,1% to 8,5% in the same period (Levich 2001). Already in1995, 50% of all listed companies in the world were listed in emerging equitymarkets (Kumar and Tsetsekos 1999).1 According to the definition of the International Finance Corporation (IFC) in the Emerging StockMarkets Factbook 1996 (cited in Levich 2001), an emerging equity market is any stock market in adeveloping economy with potential to mature.

3Figure 2: World Equity Market Capitalization and Emerging Market ShareSource: Levich (2001)Kumar and Tsetsekos (1999) argue that the difference between developed andemerging equity markets is not only due to their level of economic development, butalso because the origin of emerging equity markets is more recent. Therefore, theinstitutional infrastructure “affirming and protecting property rights, mandatingdisclosure requirements, promoting accounting practices conforming to internationalstandards, supervising and regulating these markets, may be inadequate or evenabsent” (Kumar and Tsetsekos 1999, p. 444).In order to be able to develop a comparative analysis of stock exchanges indeveloped and emerging countries, they first have to be described in detail. Hence,the following study develops a descriptive analysis about market structure and rulesgoverning the trading process on stock exchanges in emerging markets. Emergingmarkets can be categorized in three subgroups of the developing world: emergingcountries, economies in transition, and oil-exporting countries (IMF 1996). Thisanalysis contains countries of each subgroup: China, Brazil and South Africa asemerging countries, Turkey, India, and Poland as economies in transition. By

4definition, Dubai can be considered as an oil-exporting country. Moreover, theselected countries represent four continents as well as the prevailing religionsChristian, Islam, Hindu, and Buddhism.This study forms a part of an international project comparing stock exchanges ofdifferent segments with regard to the issues outlined above. At the moment there areanother two analyses in progress: Market Architecture of the largest Stock Exchanges (Philipp Schauer, InnsbruckUniversity School of Management) Market Architecture of the largest Futures and Options Markets (Albin Sikman,Innsbruck University School of Management)Figure 3: Market Capitalization as a Percentage of GNP vs. GNP Per CapitaSource: Levich (2001)Figure 3 charts GNP per capita against market capitalization as a percentage of GNPto show the general characteristics of developed, emerging, and frontier equitymarkets.

51.2 Course of ExplorationThis thesis is composed of four chapters in addition to the introduction. In Chapter 2,preliminary considerations present the selected stock exchanges that are subject tofurther analysis. Therefore, Chapter 2.1 is to describe some key attributes andfunctions of sock exchanges in general. Chapter 2.2 presents the history anddevelopment of the emerging stock markets in conjunction with an overview of theirmarket statistics. Chapter 2.3 summarizes the organizational structures and Chapter2.4 depicts the market statistics of 2005 to get an idea of the proportion of marketsize. A concluding focus in Chapter 2 examines the currencies used in the emergingmarkets and their exchange rates quoted in Euros (Chapter 2.5). Chapter 3 presentsthe key issues in market architecture. This chapter provides the theoretical basis forthis research study. Features as how to characterize stock exchanges are elaborateddefining their market participants (Chapter 3.1) and describing their opening hoursand trading days (Chapter 3.2). With the focus on the market design, the types ofmarket structure and mechanisms of price discovery will be presented in Chapters3.3 and 3.4. The difference between electronic and floor trading is explained inchapter 3.5 followed by a description of orders and order books (Chapter 3.6). Thischapter ends with an illustration of how trading is organized in case of extraordinarycircumstances (Chapter 3.7). Chapter 4 analyzes the selected stock exchanges basedon the theory worked out in the previous chapters. Here, the rules and marketmechanisms of the seven selected stock exchanges are broken down into depth.Chapter 5 concludes with a summary of the key findings.

62 Preliminary Considerations2.1 The Stock Exchange in GeneralEvery stock exchange is a system where shares and other securities, issued bycompanies and listed by the exchange are traded. Though, probably the most obviousway to classify financial markets corresponds to the type of securities traded in thoseexchanges. Traditional exchanges are subdivided into currency, stock, andcommodity exchanges depending on the assets traded on them. The modern form ofcommodity exchange is the futures exchange.A stock exchange has two main functions: raising capital and trading. Raising capitaltakes place in the primary market. On the primary market shares of newly listedcompanies are issued by means of initial public offerings. Furthermore, there arerights issues by existing companies quoted on the exchange. These issues arepurchased directly from the issuer and since they are new they also affect the size ofthe equity pool. The secondary market is where these securities are actually traded ina regulated environment. The market participants determine the prices of thesecurities through supply and demand whereas in the primary market the initial priceis set (JSE 2004). The third market comprises the over-the-counter trading of listedsecurities among non-exchange members, e.g. institutional investors andbroker/dealers. The fourth market involves direct trading of securities betweeninstitutional investors through a computer network rather through an exchange inorder to avoid transaction costs (Reilly 1986).

72.2 The selected Stock ExchangesHaving defined the stock exchanges in general, the following paragraph will give adetailed overview of the selected stock exchanges comprising history, development,form of enterprise and market statistics.2.2.1 The Johannesburg Stock ExchangeIn 1887, the Johannesburg Stock Exchange (JSE) was establisheda few months after the discovery of rich gold deposits on theReef. Investors needed a facility through which they could buyand sell gold mining shares, which dominated trading on the JSEand on several other stock exchanges at that time.In 1963, the JSE was admitted as a member of the International Federation of StockExchanges. 2 Until June 1996, the trading structure of the JSE was based on floortrading before it was replaced by computer trading (the former ATS - AutomatedTrading System). In July 2001, the JSE concluded a business agreement and atechnology agreement with the London Stock Exchange. The business agreementcomprises a strategic alliance: it facilitates cross-membership and makes dual listingspossible. The technology agreement included the replacement of the current JSE’strading and information system JET with the SETS technology which is the tradingplatform of the London Stock Exchange. On the JSE, the new trading platform isknown as the JSE SETS, the new information dissemination system is calledInfoWiz (JSE 2002)After its demutualization on July 1 st , 2005 the JSE limited was incorporated as apublic, unlisted company. Today, the JSE has the position as the biggest stockexchange in Africa. 32 www.jse.co.za/, 12/11/20053 www.jse.co.za, 22/02/2006

8Table 1: Johannesburg Stock Exchange StatisticsForm of EnterpriseJSEPublic, unlisted companyMarket Statistics 4 EUR USDDomestic Market 2002 123.276,5 116.544,40Capitalization 2003 230.431,3 260.749,10(millions) 2004 355.765,1 442.525,502005 441.315,9 549.310,31Total Value of Share Trading 2002 81.607,0 77.150,44(Turnover) 2003 88.206,0 99.811,26(millions) 2004 128.719,0 160.109,702005 161.762,0 201.346,78No. of Listed Companies 2002 4722003 4262004 4042005 388Number of Trading Days 2002 2502003 2502004 2512005 251Average Daily Turnover 2002 331,7 313,60(millions) 2003 357,5 404,502004 515,9 641,702005 644,5 802,18Average Value of Trades 2002 21,9 20,7(Transactions) 2003 27,1 30,7(thousands) 2004 32,9 40,92005 31,9 39,8Total Number of Trades 2002 3.729,87(thousands) 2003 3.253,862004 3.911,452005 5.064,04Total Number of Shares 2002 55.790,00Traded 2003 43.052,50(millions) 2004 45.438,402005 54.510,00Source: http://www.world-exchanges.org/WFE, 18/02/2006http://www.jse.co.za, 19/02/20064 See Appendix 1 for definition and calculation methods of the WFE

92.2.2 The National Stock Exchange of IndiaThe National Stock Exchange of India limited (NSE)is located in Mumbai, the financial centre of India.The NSE was incorporated in November 1992 as atax-paying company and was given recognition as a stock exchange in April 1993. Itstarted operations in June 1994 and launched subsequently the Capital MarketSegment in November 1994 as a trading platform for equities, and the Futures andOptions Segment in June 2000 for various derivative instruments.The creation of a second stock exchange, besides the Bombay Stock Exchange, wasdue to inefficiencies in the Indian financial market. Need was felt for betterregulation, discipline, and accountability.Although it was established as a public limited company, the NSE adopted the formof a de-mutualized exchange, hence is a for-profit, tax-paying company, owned by aset of leading financial institutions, banks, insurance companies and other financialintermediaries. 5 As of March 31, 2005 the number of shareholders is 21, all of themcoming from the financial sector (NSE 2005).5 http://www.nseindia.com/, 22/02/2006

10Table 2: National Stock Exchange of India StatisticsForm of EnterpriseNSEFor-profit, tax-paying companyMarket Statistics 6 EUR USDDomestic Market 2002 118.949,7 112.453,90Capitalization 2003 223.489,0 252.893,40(millions) 2004 292.053,0 363.276,002005 414.532,3 515.972,48Total Value of Share Trading 2002 135.959,3 128.534,60(Turnover) 2003 179.277,6 202.865,20(millions) 2004 209.354,0 260.409,202005 252.653,8 314.480,70No. of Listed Companies 2002 8092003 8972004 9572005 1034Number of Trading Days 2002 2512003 2542004 2542005 251Average Daily Turnover 2002 541,7 512,10(millions) 2003 705,8 798,702004 824,2 1.025,202005 1.006,6 1.252,91Average Value of Trades 2002 0,5 0,5(Transactions) 2003 0,5 0,6(thousands) 2004 0,5 0,62005 0,4 0,6Total Number of Trades 2002 234.000,00(thousands) 2003 336.335,602004 424.003,902005 564.799,30Total Number of Shares 2002 36.036,00Traded 2003 63.882,40(millions) 2004 70.715,002005 c.n.a.Source: http://www.world-exchanges.org/WFE, 18/02/2006http://www.nseindia.com/, 19/02/20066 See Appendix 1 for definition and calculation methods of the WFE

112.2.3 The São Paulo Stock ExchangeThe São Paulo Stock Exchange (BOVESPA,Portuguese: „A Bolsa de Valores de São Paulo“)was founded on August 23, 1890. Until theBrazilian stock exchanges underwent a series of reforms they were official entitieslinked to the finance departments of the state governments.After the enactment of the Securities Act in 1965, the Brazilian stock exchangesbecame non-profit, self-regulating institutions, with administrative and financialautonomy. Since that time, the São Paulo Stock Exchange operates under thesupervision of the Brazilian Securities and Exchange Commission (CVM) owned byits member brokerage firms. The implementation of the electronic trading system in1997, MEGA, allowed the BOVESPA to consolidate its position as the mostimportant trading centre in the Latin American market (see Figure 4). 7Figure 4: Latin American Exchanges – Traded Value in 09/05Mexico21%Santiago3%Colombia5%Buenos Aires3%BOVESPA68%Source: BEST (2005a)7 http://www.bovespa.com.br/indexi.as , 18/12/05

12The success of the electronic trading system and the decreasing interest for openoutcry trading finally resulted in closing the trading floor. Figure 5 illustrates themigration from floor to electronic trading after the implementation in 1997.Figure 5: Participation of the electronic trading (as percentage of total)Source: BOVESPA (2005a)In January 2000, stock exchanges in Brazil merged under the leadership ofBOVESPA. 8 Since then, stocks are traded solely on BOVESPA, public securities onthe Rio de Janeiro Stock Exchanges, and the other regional exchanges conductactivities such as market development and provision of services to the local markets.(Brazil Report 2004)8 Since that time, the stock exchanges of Bahia-Sergipe-Alagoas, Bolsa Regional, Extremo Sul,Minas-Espírito Santo-Brasília, Paraná, Pernambuco and Paraíba, Rio de Janeiro, Santos, and SãoPaulo form a single stock market on a nationwide level, with a single trading, custody, and settlementsystem. Stocks are traded in São Paulo, while public securities are traded in Rio de Janeiro.

13Table 3: São Paulo Stock Exchange StatisticsForm of EnterpriseBOVESPANon-profit, self-regulating organizationMarket Statistics 9 EUR USDDomestic Market 2002 134.083,8 126.761,5Capitalization 2003 200.038,6 226.357,7(millions) 2004 265.579,7 330.346,62005 381.331,3 474.646,9Total Value of Share Trading 2002 48.974,7 46.300,2(Turnover) 2003 58.703,8 66.427,5(millions) 2004 83.602,1 103.990,12005 133.755,6 166.486,9No. of Listed Companies 2002 4122003 3912004 3882005 343Number of Trading Days 2002 2492003 2502004 2492005 251Average Daily Turnover 2002 196,6 185,90(millions) 2003 234,8 265,702004 335,7 417,602005 532,9 663,29Average Value of Trades 2002 7,0 6,6(Transactions) 2003 5,9 6,7(thousands) 2004 6,3 7,82005 8,6 10,7Total Number of Trades 2002 7.014,80(thousands) 2003 9.899,102004 13.383,702005 15.495,20Total Number of Shares 2002 16.652.143,00Traded 2003 26.872.599,80(millions) 2004 23.863.469,902005 c.n.a.Source: http://www.world-exchanges.org/WFE, 18/02/2006http://www.bovespa.com.br/indexi.asp, 19/02/20069 See Appendix 1 for definition and calculation methods of the WFE

142.2.4 The Shanghai Stock ExchangeThe history of stock trading in China can betraced back to the 1860s, before in 1891 thecreation of the Brokers Association formed the first stage of the evolution of Chinasstock exchange. The Chinese security market gradually developed under reforms andopening policies until on November 26 th , 1990, the Shanghai Stock Exchange (SSE)was founded. On December 19 th in the same year, the exchange started operations asa non-profit-making membership institution directly governed by the ChinaSecurities Regulatory Commission (CSRC).After several years, the SSE has become the most important stock market inMainland China in terms of number of listed companies, number of shares listed,total market value, tradable market value, securities turnover in value, stock turnoverin value and the T-bond turnover in value. 10There are three categories dividing securities listed on the SSE into stocks, bondsand investment funds. Stocks can be further described as A-shares and B-shares. A-shares are designated for domestic investors only, whereas B-shares are to trade forall investors (SSE 2004).10 http://www.sse.com.cn/sseportal/en_us/ps/about/bi.shtml, 05/01/2006

15Table 4: Shanghai Stock Exchange StatisticsForm of EnterpriseSSENon-profit institutionMarket Statistics 11 EUR USDDomestic Market 2002 324.145,2 306.443,60Capitalization 2003 318.236,0 360.106,30(millions) 2004 252.691,8 314.315,702005 229.925,3 286.190,31Total Value of Share Trading 2002 223.869,4 211.643,90(Turnover) 2003 226.203,2 255.964,70(millions) 2004 259.535,6 322.828,602005 191.858,7 238.808,50No. of Listed Companies 2002 7152003 7802004 8372005 1.069Number of Trading Days 2002 2372003 2412004 2432005 242Average Daily Turnover 2002 944,6 893,00(millions) 2003 938,6 1.062,102004 1.068,0 1.328,502005 792,8 986,81Average Value of Trades 2002 1,3 1,2(Transactions) 2003 1,1 1,2(thousands) 2004 1,0 1,22005 0,9 1,1Total Number of Trades 2002 178.650,00(thousands) 2003 205.553,902004 259.043,402005 210.139,80Total Number of Shares 2002 235.478,50Traded 2003 269.272,90(millions) 2004 360.774,202005 c.n.a.Source: http://www.world-exchanges.org/WFE, 18/02/2006http://www.sse.com.cn/sseportal/en_us/ps/home.shtml, 19/02/200611 See Appendix 1 for definition and calculation methods of the WFE

162.2.5 The Istanbul Stock ExchangeThe Istanbul Stock Exchange (ISE) (Turkish: İstanbulMenkul Kıymetler Borsası, İMKB) was established inearly 1986 and is still the only securities exchange inTurkey. The exchange provides trading in equities, bonds and bills, revenue-sharingcertificates, private sector bonds, foreign securities and real estate certificates as wellas international securities. Five members elected by the General Assembly governthe ISE. One of them is the Chairman and Chief Executive Officer of the ISE; thefour other members of the Council represent the three categories of Exchangemembers: development banks, commercial banks and brokerage houses.The Istanbul Stock Exchange is an autonomous, professional organization, consistingof the Stock Market, the Bonds and Bills Market, and the International Market (seeFigure 6). Its revenues generated from fees charged on transactions, listingprocedures and miscellaneous services are not distributed to any third parties. 12Figure 6: The Istanbul Stock Exchange MarketsSource: Birsen (2005)12 http://www.ise.org/about/organize.htm, 03/03/2006

17Table 5: Istanbul Stock Exchange StatisticsForm of EnterpriseISESelf-regulating, autonomous organizationMarket Statistics 13 EUR USDDomestic Market 2002 36.388,7 34.401,53Capitalization 2003 60.979,7 69.002,78(millions) 2004 78.845,1 98.073,052005 130.805,1 162.814,41Total Value of Share Trading 2002 74.843,6 70.756,37(Turnover) 2003 88.518,9 100.165,36(millions) 2004 118.786,6 147.755,092005 162.096,7 201.763,44No. of Listed Companies 2002 2882003 2862004 2972005 304Number of Trading Days 2002 2522003 2462004 2492005 254Average Daily Turnover 2002 297,0 280,78(millions) 2003 359,8 407,182004 477,1 593,392005 638,2 794,34Average Value of Trades 2002 2,5 2,4(Transactions) 2003 2,7 3,1(thousands) 2004 2,7 3,42005 3,7 4,6Total Number of Trades 2002 28.967,00(thousands) 2003 29.944,002004 41.508,002005 43.943,00Total Number of Shares 2002 33.933,25Traded 2003 59.099,80(millions) 2004 69.614,702005 c.n.a.Source: http://www.world-exchanges.org/WFE, 18/02/2006http://www.ise.org/, 19/02/200613 See Appendix 1 for definition and calculation methods of the WFE

182.2.6 The Warsaw Stock ExchangeThe Warsaw Stock Exchange (WSE, Polish: GiełdaPapierów Wartościowych w Warszawie SA (GPW))opened on May 12, 1817, the first stock exchange inPoland started trading as the Mercantile Exchange in Warsaw on May 16, 1817.During World War II and the following regime of the communist system, theWarsaw Stock Exchange was closed. Not until 1989, along with political changes,the new non-communist government began creating the infrastructure of the Polishcapital market. On October 16, 1990 Poland and France signed the intergovernmentalagreement to create a stock exchange in Warsaw, before the first tradingsession was held on April 16, 1991. In the following months, a computerized traderegistration system and a computerized settlement system were introduced. InOctober 1994, the WSE was accepted as full member of the International Federationof Stock Exchanges (FIBV) before the WSE was accepted as a full member of theFederation of European Securities Exchanges (FESE), ten years later (WSE 2005).Today, the non-profit, joint-stock company currently has 38 shareholders, includingbrokerage houses, banks, a listed company, and the State Treasury. Figure 7 gives anoverview of the structure of the Polish capital market.Figure 7: Structure of the Polish Capital MarketSource: http://www.gpw.com.pl/index_e.asp, 06/01/2006

19Table 6: Warsaw Stock Exchange StatisticsForm of EnterpriseWSENon-profit, joint-stock companyMarket Statistics 14 EUR USDDomestic Market 2002 28.663,1 27.097,8Capitalization 2003 31.821,5 36.008,3(millions) 2004 47.343,2 58.888,72005 76.663,7 95.424,0Total Value of Share Trading 2002 16.503,9 15.602,6(Turnover) 2003 18.132,1 20.517,7(millions) 2004 26.181,4 32.566,32005 47.500,9 59.124,8No. of Listed Companies 2002 2162003 2032004 2302005 255Number of Trading Days 2002 2492003 2512004 2552005 251Average Daily Turnover 2002 33,2 31,4(millions) 2003 34,0 38,52004 51,3 63,82005 189,2 235,6Average Value of Trades 2002 3,0 2,8(Transactions) 2003 2,7 3,1(thousands) 2004 3,3 4,12005 9,5 11,9Total Number of Trades 2002 2.999,52003 3.245,72004 4.141,72005 4.984,1Total Number of Shares 2002 2.696,0Traded 2003 3.160,3(millions) 2004 4.235,12005 c.n.a.Source: http://www.world-exchanges.org/WFE, 18/02/2006http://www.wse.com.pl/index_e.asp, 19/02/200614 See Appendix 1 for definition and calculation methods of the WFE

202.2.7 The Dubai International Financial ExchangeTrading on the Dubai International Financial Exchange (DIFX)started in September 2005 and currently has 10 member banks. 15The DIFX provides trading in equities, bonds, funds, Islamicproducts, index products and derivatives. The new exchange islocated in the Dubai International Financial Centre (DIFC), a financial free zone thatopened for business in 2004.The Dubai Financial Services Authority (DFSA) as an independent unitaryregulatory authority governs the financial activities in the DIFC. The DFSA is beingcreated using principle based legislation models such as the ones used in London andNew York to meet or even exceed the international standards. The President of theDIFC is His Highness Sheikh Mohammed Bin Rashid Al Maktoum, the UAE VicePresident, Prime Minister and Ruler of Dubai. 16The DIFX was incorporated as a limited liability company under the CompaniesLaw, DIFC Law No. 2, on 29 September, 2004 and is a wholly owned subsidiary ofthe DIFC Authority. 1715 Due to its recent development, no significant market statistics are available.16 http://www.difx.ae/about/, 10/03/200617 http://www.difx.ae/about/the_organisation/index.html

212.3 Organizational StructureTable 7 shows a summary of the organizational structures of the selected stockexchanges.Table 7: Synoptical Table: Organizational StructuresName Form of Enterprise OwnershipJohannesburg Stock Exchange Public, unlisted company c.n.a.National Stock Exchange of IndiaSão Paulo Stock ExchangeFor-profit, tax-paying companyNon-profit, self-regulating organizationShanghai Stock Exchange Non-profit institution c.n.a.Istanbul Stock ExchangeSelf-regulating, autonomousorganization21 shareholders: financial institutions,banks, insurance companies and otherfinancial intermediariesMember brokerage firms, listedcompanies, institutionaland individual investorsc.n.a.Warsaw Stock Exchange Non-profit joint-stock company 38 shareholdersDubai International FinancialExchangeLimited liability companywholly owned subsidiary of the DIFCAuthority2.4 Market StatisticsIn order to get an idea about the size of the selected stock exchanges Table 8summarizes market statistics of the year 2005. Table 9 exemplifies the proportion ofthe selected stock exchanges, whereas Table 10 highlights the differences in sizewhen compared to the largest stock exchanges.Table 8: Market Statistics of the selected Stock Exchanges 20052005 in EUR JSE NSE BOVESPA SSE ISE WSE DIFXDomestic MarketCapitalization(in millions)441.316 414.532 381.331 229.925 130.805 76.664 c.n.a.No. of Listed Companies 388 1.034 343 1.069 304 255 c.n.a.Total Value of Share Trading(Turnover, in millions)Average Daily Turnover(in millions)Total Number of Trades(in thousands)Total Number of SharesTraded (in millions)Average Value of Trades(Transactions) (in thousands)161.762 252.654 133.756 191.859 162.097 47.501 c.n.a.644 1.007 533 793 638 189 c.n.a.5.064 564.799 15.495 210.140 43.943 4.984 c.n.a.54.510 c.n.a. c.n.a. c.n.a. c.n.a. c.n.a. c.n.a.31,9 0,4 8,6 0,9 3,7 9,5 c.n.a.

22Table 9: Domestic Market Capitalization and Total Value of Share Trading of the selectedStock Exchanges 2005450.000400.000In Million Euros350.000300.000250.000200.000150.000100.00050.000Domestic MarketCapitalization (millions)Total Value of ShareTrading (millions)0JSENSEBOVESPASSEISEWSEDIFXTable 10: Market Data Comparison: Emerging Stock Markets and the largest Stock Exchanges12.000.000NYSENASDAQTSELSEDBEuronext10.000.0008.000.000In Million Euros6.000.0004.000.0002.000.000Domestic MarketCapitalization (millions)Total Value of ShareTrading (millions)600.000400.000200.000JSENSEBOVESPASSEISEWSE

232.5 Exchange RatesFor the purpose of this paper, a reasonable approximation and satisfying illustrationof the currency differences is the calculation of the average annual exchange rate.The monthly quotations of the foreign exchange rates, denoted on the Web sitewww.x-rates.com, are collected for the years 2002 to 2005 and then translated intothe average annual exchange rate quoted in Euros.Table 11: Average Exchange Rates2002 1 EUR 0.94539 USDAmerican Dollar 2003 1 EUR 1.13157 USD(annual average) 2004 1 EUR 1.24387 USD2005 1 EUR 1.24471 USD2002 1 EUR 9,9072 ZARSouth African Rand 2003 1 EUR 8,5317 ZAR(annual average) 2004 1 EUR 8,0092 ZAR2005 1 EUR 7,9183 ZAR2002 1 EUR 45,95907 INRIndian Rupees 2003 1 EUR 52,69545 INR(annual average) 2004 1 EUR 56,30598 INR2005 1 EUR 54,75286 INR2002 1 EUR 2,78829 BRLBrazilian Real 2003 1 EUR 3,47551 BRL(annual average) 2004 1 EUR 3,63664 BRL2005 1 EUR 3,03751 BRL2002 1 EUR 7,82859 CNYChina Yuan Renminbi 2003 1 EUR 9,37011 CNY(annual average) 2004 1 EUR 10,29528 CNY2005 1 EUR 10,20279 CNY2002 1 EUR 1.439.680 TRLNew Turkish Lira 18 2003 1 EUR 1.694851 TRL(annual average) 2004 1 EUR 1.777.050 TRL2005 1 EUR 1,6771 TRY2002 1 EUR 3,8574 PLNPolish Zloty 2003 1 EUR 4,3996 PLN(annual average) 2004 1 EUR 4,5268 PLN2005 1 EUR 4,0230 PLN2002 1 EUR 3,47194 DhUnited Arab Emirates Dirham 19 2003 1 EUR 4,15569 Dh(annual average) 2004 1 EUR 4,56811 Dh2005 1 EUR 4,57120 DhSource: http://www.x-rates.com, 03/02/2006http://www.bundesbank.de/statistik/statistik_zeitreihen.php, 19/02/200618 Since January 1, 2005, a currency reform established the New Turkish Lira (Turkish: Yeni TürkLirası, YTL, ISO-4217-Code: TRY) replacing the Turkish Lira (TRL). The currency reform was dueto chronic inflation since the 1970s19 The AED exchange rate has been adjusted to AED 3,6725 for each US Dollar, effective Nov. 1997.See, Central Bank of the United Arab Emirates (2005)

243 Rules and Market MechanismsIn the following part of the thesis, the different rules and regulations that govern theexchanges and how they determine the functioning of the trading mechanism areelaborated. The rules state, who can trade, when and how orders can be submitted,who may see and handle the orders, how orders are processed, and how prices areset. The rules may apply to every order submitted or there may be differential rulesgoverning various aspects of trading.3.1 Market ParticipantsIn the trading mechanism, a range of market participants may be involved. Stockexchanges may have various definitions and forms of participants; however, in theirbasic definitions they are all quite similar. The literature about trading systems andmarket structure identifies mainly four participants performing on the exchange:customers, brokers, dealers, and market makers.3.1.1 CustomersCustomers/investors on an exchange are the ones submitting orders to buy or sell(O’Hara 1995). They can be individuals and institutions like banks, pension funds ormutual funds. Individual customers generally trade smaller amounts than institutions(retail customers). Regardless if customers are individual investors or specializedinstitutions, through trading they add liquidity to the market and therefore influencethe market-making process (Hasbrouck 2004, p. 167).3.1.2 BrokersA Broker is an intermediary offering services to investors. The investors send anorder to the broker specifying the name of the stock and the quantity to be bought orsold. The broker then acts as an agent to find a compatible trading partner and tonegotiate acceptable transaction prices for his clients (Schwartz 1988), thusresponding to the problem of random order arrival (Kriegel 2001). As a

25compensation of this service, they charge a commission or fee “tied to the outcome,usually stated as a percentage of the sale price” (Campbell 1988, p. 306).Brokers can be individual members of the stock exchange or employed by abrokerage house. They all perform the same functions and do not trade for their ownaccount but on behalf of their customers. These customers may be retail traders, orother market participants such as dealers, who simply wish to disguise their realtrading intentions.3.1.3 DealersAs stated above, brokers do not actively trade assets; they rather act as agentsoffering services. “A dealer, unlike a broker, participates in trades as a principal”[not in italics in original version] (Schwartz 1988, p.18). Dealers buy and sellsecurities on their own account and thus hold an inventory and therefore, stand readyto execute the transaction when the buyer or seller desires (Campbell 1988, p.306).Hence, dealers provide a service, which has been referred to Demsetz (1968 cited inCampbell, 1988) as “immediacy”.3.1.4 Market MakersA combination of the roles of brokers and dealers is known as the specialist. 20 Thespecialist acts as an auctioneer by quoting bid-ask prices for a single stock andsupervising the bargain of the brokers. The specialist acts as an agent executingorders or trades as a principal on his own account if this is required to provide a fairand orderly market (Kriegel 2001, p. 37).Market makers (also called specialists) intermediate between buyers and sellers.They quote prices to buy or sell the asset (bid/ask quotes). Specialists take a positionin the asset until an offsetting order arrives, so they also have a dealer function(O’Hara 1995).20 The distinction of market makers, assigned dealers and specialist is blurry and inconsistent. Someauthors like Kriegel (2001) define a specialist as an “assigned dealer”, which is a combination of therole of a broker and a dealer. Others use the term market maker and specialist interchangeably(O’Hara 1995); Schwartz (1988) defines the market maker as a dealer that has specialized in a certainissue (p.43) and later as both dealers and specialists (p.387ff)

263.2 Opening Hours and Trading DaysIn the respective section analyzing the selected stock exchanges (Chapter 4), theopening or trading hours and trading days will be presented.3.3 Types of Market StructureMarkets make the exchange of securities among investors possible. According toGarbade (1982), markets, in which securities are traded may be categorizedcorresponding to how investors have to seek out compatible trading partners. Thereare five types of market structure: Direct search markets• Brokered markets• Dealer markets• Auction markets• Hybrid markets.Moving from direct search markets to brokered markets, dealer markets and auctionmarkets fixed costs for regulations and physical trading facilities increase, the costsper trade decrease, and the structural prerequisites increase.3.3.1 Direct Search MarketsSecurities traded in direct search markets are usually bought and sold so infrequentlythat no broker or dealer has an incentive to provide any kind of service to facilitatetrading. Hence, buyers and sellers must search a trading partner among all possiblepartners for the best possible price. This implies the probability that at the same timea trade has been agreed upon, a better price could have been possible with anotherpartner. Furthermore and due to the same circumstance, trades can occur at the sametime for the same securities at different prices (Garbade 1982).

273.3.2 Brokered MarketsIn a brokered market there is an intermediary, who offers search services toinvestors. The intermediary in form of a broker acts like an agent to find acompatible trading partner and to negotiate acceptable transaction prices for hisclients (Schwartz 1988). For a brokerage fee, the investors benefit not only from thereduction of costs for searching on their own but even more from the broker’snetwork such as contacts and information system to get transactions closer to the bestprices available on the market (Garbade 1982).3.3.3 Dealer Markets/ Quote-Driven MarketsIn a dealer market buyers and sellers trade with intermediaries, who often act asprincipals, maintaining inventories, and standing ready to supply immediacy at theirgiven quotes (Schwartz 1988). Unlike the broker, searching out a compatible tradingpartner for a client while prices of the securities may change, the dealer eliminatesthe need for time-consuming searches in guaranteeing prompt execution of orders athis quoted prices. In sufficiently active markets, dealers provide a service by quotingbid-ask prices for selling and buying securities respectively (Barucci 2003). Sinceinvestors trade against this prices quoted by the dealer it is also referred to as aquote-driven market. The difference between the quotes, the bid/ask spread,corresponds to the dealer’s profit and is the compensation for providing the liquidityof an immediately available market and for the risk in holding a security in hisinventory.Although the dealers’ quotes for an issue differ throughout the market, the investorsbenefit from the dealers’ incentive to advertise themselves, showing their willingnessto buy or sell, and thus reducing the cost of search to discover the best prices fortheir trades (Garbade 1982).3.3.4 Auction Markets/ Order-Driven MarketsThe disadvantage of different quotes throughout the market no longer has any effectin an auction market or an order-driven market. There, buyers and sellers transact

293.4 Price DiscoveryOne of the most important topics in market microstructure is the design of tradingprotocols. Since they provide the framework within which markets operate, they playa central role in price formation and discovery (Madhavan 2000).Generally speaking, the price formation on an exchange is based on supply anddemand conditions. Different expectations on the future price of an asset makeinvestors trade at different prices (Giridhar 2004). The discovery of the price occurswhen these prices match and trade is executed. Mechanisms determining the priceare subject for further analysis.3.4.1 Call AuctionTo determine the asset price traded in a market, the call auction is one of themechanisms that can be found on stock exchanges. However, call markets areprimarily agency or auction, not dealer, markets (Schwartz 1988). Investorscommission brokers to place a buy or a sell order, which are sent to the order bookwhere they interact directly with other offsetting orders. Hence, a dealer needs not toparticipate in trading as an intermediary. A call market operates accumulating theseorders over a certain period and batching them “for simultaneous execution when themarket is ‘called’” (Schwartz 1988, p.19) at “pre-established discrete times”(Garman 1976, p. 260). The most commonly used matching algorithms determinethe trading price as the price that minimizes imbalances between buy and sell orders,or as the price that maximizes the number of trades, also called the market clearingprice. At the call, all orders to buy are aggregated into a downward-sloping demandfunction and all orders to sell into an upward-sloping supply function. Theintersection of these two functions determines the call price and the quantity traded.Multilateral matching 24 , then, sets the specification what orders exactly trade, their24 In the multilateral order-matching mechanism, after Jeffrey Lange and Nicholas Economides, thereis “no requirement of a discrete order match between a single buyer and a single seller. Rather, theorder-matching mechanism is inherently “many-to-one” in the sense that any given contingent claim’spayout is funded multilaterally by all of the other orders which are filled in equilibrium.”(Lange Economides 2003)

30price and quantity (Cohen and Schwartz 2001). Stock exchanges, which areorganized as call markets to discover the prices have typically one or two calls for astock in a trading day.3.4.2 Continuous AuctionThe alternative type of call market is the continuous market. Both dealer and auctionmarkets can be continuous. Investors can place orders to buy or sell any time themarket is in operation, and transactions “result from a bilateral matching of one buyorder against another sell order” (Cohen and Schwartz 2001, p.60). The continuousmarket increases the flexibility because incoming orders are checked for possiblematch and executed immediately at the price available on the counter side of theorder book and not in discrete times when the market operates, as in a call market(Henke 2004). In a dealer market, the market maker has an obligation to maintain acontinuous, two-sided market for the stock. Thus, the dealers offering bid and askquotes continuously determine the price of the traded security.3.4.3 Mixed SystemsSome stock exchanges combine the systems of continuous and batched (call auction)trading. 25 At a particularly critical moment during the day, e.g. at the market openingand closing, some exchanges operate as a call market. In the opening procedure,orders that have been placed before the start of the trading session are batchedtogether to determine the opening price. After the opening call auction, tradingoccurs continuously. Hence, some stock exchanges combine synchronous trading atpre-established discrete times and asynchronous trading during continuous intervalsof time, in order to concentrate liquidity (Schwartz 2001).Furthermore, a market operating with continuous trading loses its ability to discoverprices appropriately from time-to-time. When the market is under stress, that is“when prices in the continuous market de-couple from underlying consensus values”(Schwartz 2001, p. 16), trading is halted briefly. 26 The reopening procedure after this25 See Chapters 4.26 See Chapter 3.7.

31“trading imbalance” 27 is a call auction, which determines the reopening price, afterwhich continuous trading proceeds.3.5 Electronic vs. Floor TradingThe market architecture designates the set of rules governing the trading process.One attribute affecting the market structure is the degree of automation. Marketsvary considerably in the extent of automation. Two opposite extremes can beidentified (see Table 12): centralized floor trading (= open outcry) and decentralizedelectronic trading (Madhavan 2002).Table 12: Key Institutional Differences between Floor and Electronic TradingKey Institutional Differences between Floor Trading and Electronic TradingInstitutional Feature Floor ElectronicLocationTrading takes place on the trading floor ofthe exchangePresence at the exchange not obligatoryIdentity of counterparty Known before the trade Usually revealed after the deal is closed although afew exchanges display broker identity beforeTransparency of availableliquidityUsually only the best bid and offer is knownto traders before orderingUsually the top-five best buy and sell prices(sometimes the whole book) are displayed ontraders’ screensPlacement of orders Via the floor traders Sent to a central computer, which places the orderin the order bookSpeed of matching tradesor immediacyOperating cost and orderprocessing costsSpeed and cost ofsettlementOrder bookTrades are matched manually based on anopen-outcry system and take from 10seconds to several minutesHigherSettlement is often paper-based, with aconsiderable lagOften does not exist; quotes are valid only aslong as “breath is warm”Source: Jain (2005) and own modificationTrades are matched automatically by a computeralgorithm within one secondLowerUsually faster, dematerialized settlement andlower costsMatches or accumulates customers’ limit orders;quotes are valid until withdrawnModern stock exchanges compete aggressively for trading activity and investorinterest. Therefore, the exchanges introduce technology to enhance their markets. Inthe past few years, technology has accelerated the speed, with which orders aresubmitted and translated into trades. Moreover, it has improved communication, andthus information. Speed and connectivity are the most obvious arguments for thegrowth of technology supporting order routing as well as clearing and settlement.27 “Trading imbalance” is according to Campbell (1988, p.305) every situation where it comes to anexcess of offers to buy or sell an asset

32However, the impact of electronic trading is heavily discussed in marketmicrostructure theory. Ananth Madhavan (2002, p. 37) states:“The factor I would single out as most influential is a practical one, namely, theneed for automation and electronic trading to handle the increasingly high volumesof trading. Although this factor will favor the increased use of electronic tradingsystems, it does not imply the demise of traditional floor-based systems. The pointto keep in mind is that what ultimately matters is not the medium of communicationbetween the investor and the market but the protocols that translate the order into arealized transaction.”Other than the one just mentioned, there are several issues that arouse resistance bymany traders and cause discussions among researchers on market microstructuretheory. 28 Nevertheless, electronic trade execution is gradually making its way in themarketplace. As shown in Figure 8, stock exchanges with floor trading combine theirprevailing system with electronic platforms as a support of the trading process orreplace it by introducing a fully automated and transparent mechanism. Furthermore,the newly established exchanges (above all those in emerging markets) are set upwith an electronic trading system due to the higher costs for installation, operation,maintenance and supervision of a floor trading system (Jain 2005). Other reasons forthe shift to automated trading are the harmonization and acceptance of regulations onfinancial markets, which accompanies the increasing demand of transnationalcooperation.28 Since this thesis does not focus on the advantages and disadvantages of electronic trading and dueto the ongoing discussion and complexity, it refers to other studies that highlight the issues efficiency,liquidity, and transparency: Madhavan (2000, 2002), Cohen and Schwartz (2001), Pechlaner (2001),Jain (2005), O’Hara (most recent field of research)

33Figure 8: The Global Shift from Floor Trading to Electronic Trading(based on automation of the leading stock exchange in 120 countries from 1975 to 2002)Source: Jain (2005)The Figure 8 shows that more and more stock exchanges introduce electronicequipment for order handling, information display, supervision of markets, clearanceand for order matching and trading (Schwartz 1988).Stock exchanges make use of an Electronic Communication Network 29 (ECN),which “is an alternative securities trading system that collects, displays, and executesorders electronically without a middleman (such as a specialist or market maker)” 30 .There are specialized companies providing exchanges with the ECN, includingsolutions for trading, clearing, settlement, surveillance in order to facilitate trading.Moreover, the use of ECNs enhances the cross-border cooperation and connectivityof stock exchanges, and thus the convergence of their institutional infrastructure.29 According to Hasbrouk (2004) an Electronic Communication Network is an alternative tradingsystem that refers to a market organized as an electronic limit order book30 http://www.freebuck.com/reference/glossary/e.htm, 02/02/2006

343.6 Orders and Order Books3.6.1 Types of OrdersA trader gives an order to a broker who, as the trader’s agent, passes the order to asecurities institution where a trade may be arranged. In order to inform the brokerexactly about the investor’s intention and to be able to implement various investmentstrategies, the investor has to specify his order. He has to tell him the exact numberof shares, if these shares are to be bought or sold and how he should handle the orderin the market. To facilitate trading and to reduce the risk of misunderstanding thereare several standardized types of orders available on stock exchanges.In general, there are two types of orders: orders with a price limit and orders withouta price limit. These order types can be further specified through additional executionconditions, validity constraints and trading restrictions. Since the availability of ordertypes vary on the respective stock exchanges the table listed below shows how ordersare characterized and will be illustrated (where applicable) in the chapter coveringthe stock exchanges in detail.Table 13: Order Types – Execution Conditions (general)Orders types Acronym Execution condition Trading PhaseNoneOrders w/oPrice LimitMarketOrderFill or KillOrders with aPrice LimitLimit OrderExecute andEliminateNoneFill or KillExecute andEliminateTable 14: Order Types – Validity Constraint (general)Orders types Acronym Validity constraints Trading PhaseNoneOrders w/o MarketGFDOrderPrice LimitGTCOrders with aPrice LimitLimit OrderNoneGFDGTC

35Orders without Price LimitMarket orders are unpriced buy or sell orders. They are to be executed at market thatis at the best price available, namely at the lowest ask posted by sellers, or thehighest bid price posted by buyers (Beiner and Schwartz 2001). Hence, marketorders guarantee immediacy of execution with no certainty of the price.Orders with a Price LimitLimit orders are to be executed at their specified limit or better. A limit buy ordersets the maximum price at which the trader will buy; a limit sell order sets theminimum price at which the trader will sell (Beiner and Schwartz 2001).Limit orders that do not execute are held on the market by being entered in a limitorder book. They remain active on the book until they execute, are cancelled by theclient or expire (Schwartz 1988).AcronymThe different stock exchanges may use acronyms for ease of communication andprevention of confusion in trading.Execution conditionThere are several possibilities to specify an order. Execution conditions specify whatexactly happens between order entry and after execution. In general, they can bedefined as persistent or non-persistent. Orders without any execution constraint willexecute as far as possible and add the remainder to the order book where they waitfor execution or cancellation. These orders are described to be persistent. Orderswith execution constraint are described as non-persistent since they never reside inthe order book:“Execute and Eliminate” (or “Immediate and Cancel”, “Fill and Kill”) orders arematched immediately and as fully as possible upon entry into the order book. Theremaining unexecuted volume is deleted from the order.“Fill or Kill” (or “Immediate or Cancel”) orders are either matched immediately andcompletely or, if full execution is not possible, the entire order is rejected from theorder book without any partial execution. Fill or Kill orders are another example ofnon-persistent orders and never reside on the order book.

36“Minimum Fill” (or “Minimum Size”, “Minimum Quantity”) orders specify aminimum portion of an order that has to be executed. In a situation, where the orderbook does not allow an order to be executed at least in the volume specified in therequirement, this order is rejected. Following partial execution the unexecutedportion remains in the order book as an order with no requirement of minimumsize. 31ValidityOrders that are not subject to execution constraints can have also validity constraints.When orders are entered, a participant can specify how long the order is valid:Day orders or “good-for-day” orders (GFD-orders) are automatically cancelled at theend of the trading day, in which they are submitted.“Good-till-cancelled” orders (GTC-orders) remain in the order book until executionor cancellation. (Schwartz 1988, p. 17)“Good-till-date” orders (GTD-orders) are valid until a specified date andautomatically cancelled after expiration date.In addition to the orders and conditions described in this chapter, there are otherorders to which is referred to in the chapters dealing with the respective exchanges,in which they occur.Trading phasesThere are regulations in which phases of trading orders are allowed to be sent to theexchange.Properties of orders in call and continuous marketsLimit and market orders have very different properties in call auctions and incontinuous markets. In a continuous market, market orders execute at the best quoteavailable on the market, hence, avoiding the risk of missing transactions, they arecharacterized as immediacy-seekers in that environment.Limit orders traders do not generally obtain an immediate execution since the price31 http://www.wse.com.pl/gpw_e.asp?cel=e_ogieldzie&k=55&i=/warset/zlecenia, 10/01/2006

37limit of a buy (sell) order is usually lower (higher) than the best counterpart offer(bid) prevailing at the time the order is placed in a continuous market. On occasion,they may not execute at all. If a limit order does execute, it generally does so at itslimit price. Since “they establish the prices at which market order placers can trade,limit orders traders are characterized as immediacy-suppliers”(Beiner and Schwartz2001, p.102).In a call auction, limit orders execute at the common clearing prices, not at the pricesat which they are written. Hence, orders that can be executed are all market buyorders, buy limit orders at the clearing price and above, all market sell orders and selllimit orders at the clearing price and below. In a call auction, there is no differencebetween limit and market orders. Market orders are executed at the prevailing pricein the market and thus can be seen as “a limit order placed at an arbitrarily high price(for a buy order) or an arbitrarily low price (for a sell order)” (Beiner and Schwartz2001, p.103). Therefore, market orders will generally execute in a call marketalthough this may not be stated by the rules of the respective exchanges (Beiner andSchwartz 2001).Table 15: Order Handling in Call vs. Continuous MarketsContinuous OrderDriven MarketCall AuctionMarket OrdersExecute at the best counterpart quoteExecute immediatelyImmediacy demandingExecute at the clearing priceNo immediate executionNot immediacy demandingSource: Beiner and Schwartz (2001)Limit OrdersExecute at price of the orderDelayed or no executionImmediacy supplyingExecute at the clearing priceNo immediate executionNot immediacy demanding3.6.2 Order RoutingAfter the investor has defined the order type, its execution condition and validity, theorder is sent to the broker, whether written via an automated system or verbal e.g. viatelephone. However, it is up to the broker to seek the best execution available. Thereare different channels the broker can use for trade execution (see Figure 9) - whichone he uses determining the order flow is called order routing.

38Figure 9: Order RoutingExchangeExchange(1)BrokerMarket MakerMarket MakerECN ECN(2)(3)Firm “Internalizes“ OrderFirm “Internalizes“ Order(4)Source: www.sec.gov/, 27/02/2006In general a broker has the following options for executing a trade: Directing the order for a listed stock to an exchange, or to a “third market maker”which is a firm standing ready to buy or sell stocks at publicly quoted prices (1) Directing the order for a stock that trades in an over-the-counter market (like theNASDAQ) to a market maker (2) Routing the order (especially a limit order) to an ECN (3) Sending the order to another division of the brokerage firm to be filled using itsown inventory (“internalization”) (4)The purpose of order routing is to find a counterparty that offsets the order to thebest conditions available. The broker executes his trade in placing the order in anorder book where all orders are displayed and waiting for match.3.6.3 Order BookThis chapter focuses on the way the orders are stored and revealed to traders within atrading system. Each market has its own restrictions defining the prices, quantitiesand conditions on any order entering the marketplace (Garman 1976) and its ownrules and priorities imposed for order display, and thus another attribute of marketdesign.

39In a dealer or quote driven market, orders displayed are the bid and ask quotations aswell as the quantity of the dealers or market makers on the stock exchange (seeFigure 10).Figure 10: Order Book in a Quote-Driven MarketSource: www.systemics.com/, 27/02/2006In the order book in a quote driven market prices for the bids to buy are on the leftcolumn, and the prices for the asks to sell are in the next column. Sizes are in thethird column, and finally, there are listed nicknames for the traders against someorders.In an order driven continuous market, incoming buy and sell orders are stored in the(limit) order book (see Figure 11). As already stated, there are two main types oforders: market orders and limit orders. Since market orders are executed immediatelyit is mostly the limit orders which are stored in the order book. “If the limit price of anewly arriving buy order exceeds the limit price of a sell order already in the system,the buy order is said to be marketable”(Hasbrouck 2002, p.170) and the orders arematched at the price determined by the limit of the sell order. However, if theincoming order is not marketable, it is added to the order book waiting for execution.Hence, they are said to “provide liquidity to future traders” (Barucci 2003, p.319).

40Figure 11: Order Book in an Order-Driven MarketSource: www.iii.co.uk/, 27/02/2006Modern limit order books use computer technology for order entry and interfaces toreporting and clearing systems. They are categorized by how much information theyshow to the public: An open order book displays the prices and quantities of all the posted orders inthe book on a screen, thus, full market depth can be viewed. A partially closed order book displays the two or three highest buy and lowest sellorders. A closed order book does not show the quotes to all market participants. The orderbook is visible only to market makers or specialist.Generally, the order book is anonymous, meaning that the trading parties do not getto know their counterparties.The order book, whether it is open or closed, contains all buy and sell orders. Buy

41orders are pooled on the side for buy orders, and sell orders on the side for sell ordersrespectively. They are ranked under the terms of trade execution: the trading priorityrules, also common as price-time priority. The price priority rule ensures that buyerswho are willing to pay the highest price will be the first to buy and sellers who arewilling to sell at the lowest price will be the first to sell. The “secondary tradingpriority rule” (Schwartz 1988, p. 18) defines the sequence to be followed for ordersthat have be submitted at the same price. The most commonly used rule is the timepriority. The time priority rule assures that the order which is placed first has to beexecuted first. Alternative secondary trading priority rules are the size priority (thelargest orders are to be executed first) and the priority of orders placed by a certainlass of traders (pro rata execution) (Schwartz 1988).3.7 Trading Interruptions and Market ClosuresThe globalization of the world’s securities markets entails a substantially growingnumber of securities that are listed on more than one exchange (“multi-listedsecurities”). Therefore, the International Organization of Securities Commissions 32(IOSCO) has elaborated standards with and for its member exchanges to cooperatesuccessfully in the international marketplace and to maintain sound markets. 33 Onetool to provide “fair, efficient and transparent” (IOSCO 2002, p.1) markets is tradinginterruptions to address both potential and actual market disorder allowing time toevaluate the imbalance’s cause and to rebalance at a new trading price.The IOSCO carried out a survey (Report on Trading Halts and Market Closures2002) exploring the operation of trading interruptions, the issues raised in respect ofmulti-listed securities, and the implications for interactions among nationalregulators and markets.Trading interruptions, which include trading halts and market closures, are utilized in32 The International Organization of Securities Commissions is a forum of international cooperationfor securities regulatory agencies. It is the recognized international standard setter for securitiesmarkets comprising 169 members. The analyzed markets all are represented in the IOSCO, whether asordinary, associate, or affiliate members.33 If not otherwise stated, the information is taken out of the report of the Technical Committee of theInternational Organization of Securities Commissions “Trading Halts and Market Closures” (IOSCO2002).

42all exchanges. Generally, more than one authority has the ability to impose a tradinginterruption. Based on the survey, two main categories can be identified:discretionary and automatic trading halts.The discretionary trading interruption refers to an essentially subjective action of themarket operator or regulatory authority to halt trading in a security or group ofsecurities. It is imposed “to facilitate the orderly absorption by market users of newinformation material to the valuation placed on an issuer’s securities” (IOSCO 2002,p.1). Moreover, it may be imposed due to extraordinary market events such as anissuer’s failure to comply listing standards, or disorderly trading influenced by fraudor manipulation or when an order imbalance occurs. 34 The duration of this kind ofinterruption depends on its purpose and on the scope of impact: whether a singlesecurity, a group of securities or the whole market is affected.The automatic trading interruption is stipulated in the market rules of the respectivestock exchanges. It is triggered if the reference variable of a security or indexexceeds preset limits. As a reference variable price or volume may be determined.Thus, two types of automatic trading interruptions can be identified: price limits andcircuit breakers.A price limit may prohibit trading outside preset bands that is above or below certainlimits. Price limits are not to be confused with the trading halts described abovebecause they are based on price changes and are implemented automatically whenthe limit is reached.Stock exchanges may have static thresholds that are tied to the last price quoted onthe previous session or both static and dynamic thresholds, which are based on thelast traded price. A share, which was traded for €100 at the close of a business dayand is subject to a static limit of 10% cannot be traded below €90 and above €110 onthe next trading day. A share that is subject to a dynamic limit of 2%, hence, cannotbe traded for less than €98 or more than €102 at the following trade.Price limits are used more commonly in order-driven than in quote-driven markets.In order-driven markets it may occur that the order book is unevenly filled and the34 In order to prevent a disorderly market, the U.S. market authorities halted all trading in the majormarkets for four days after the attacks on September 11, 2001. Insider trading is another example fortrading interruptions.

43time, which is needed to refill it after a depletion of one side of the book, could effectsignificant price fluctuations. In a quote-driven market, market makers commit toprovide continuous liquidity, hence balance short term excess volatility.The second form of trading interruptions identified by the underlying survey iscircuit breakers. 35 Circuit breakers provide coordinated, cross-market trading haltsduring a severe market decline. Many stock exchanges have pre-determined circuitbreakers that are triggered when a reference index exceeds pre-set limits causing theentire market to halt. The duration of a trading halt by circuit breakers depends onthe percentage of decline and the time circuit breakers are triggered during a tradingday. If a steep decline in the market occurs, trading will be halted longer; if this kindof trading halt is triggered closer to the end of the trading day, the exchange will stayclosed for the rest of that day.Furthermore, banking holidays and system malfunction can be seen as trading halts.However, since they do not facilitate the dissemination of information they are notincluded within the scope of the underling report published by the IOSCO. However,stock exchanges may have rules that govern those issues.Issues related to trading interruptions of multi-listed securitiesSecurities can be listed on only one exchange, some are listed on more than onemarket within the responsibility of a single institution, or they can be listed on morethan one market in different jurisdictions. Thus, when there is a trading interruptionin a multi-listed security, market participants may be able to trade the halted securityin another trading venue. Due to the possibility of arbitrage, the IOSCO analyzed thecircumstances, in which imposing a parallel trading halt should be considered.Within a jurisdiction, issues such as the degree of transparency of the rules and thepossibility of arbitrage are not that severe as the ones of a security listed on severalexchanges. When a market imposes a trading halt or has the intention to do so, itimmediately informs all the other markets where the security is traded within thisunity. Subsequently, the markets concerned communicate directly with each other35 In the U.S. stopping the market is referred to circuit breaker in Germany it is referred to volatilityinterruption (Cf. Schwartz, 2001)

44and decide if a parallel trading halt is appropriate and necessary. Furthermore, withina jurisdiction the potential of arbitrage is limited. Once a trading halt is imposed,market rules often require that this security cannot be traded on any other market.Unlike trading interruptions of securities traded in only one jurisdiction, theimportance of cooperative arrangements and communication between markets andtheir regulators is far more pronounced for trading halts of securities listed on stockexchanges in several jurisdictions. The number of multi-listed securities traded onmarkets in different jurisdictions is steadily increasing and hence, the matter ofarbitrage is more complex.A market that implements a trading halt or intends to do so will notify foreignmarkets that list the halted or related security, and will communicate the reasons forsuch an event. The market regulators of the informed market then decide whether itcan and should impose a trading halt. However, communication between severalstock exchanges may be very difficult, sometimes even impossible because themarket is not aware of where else the security concerned is listed. Under thesecircumstances arbitrage may not be abandoned.

454 Rules and Market Mechanism on the selected Stock Exchanges4.1 The Johannesburg Stock ExchangeThe following paragraph elaborates the market design of the Johannesburg StockExchange based on the JSE Equities Trading Manual 2004 (JSE 2004) as well as onthe theory worked out in Chapter 3.Market ParticipantsThe Rules and Directives of the Exchange Membership and the Stock ExchangesControl Act, 1985 (as amended) govern the membership of the JSE. For membershipof the JSE only sole proprietors, partnerships and corporate entities (with limited orunlimited liability) may apply. 36Table 16: Market Participants of the JSEStockbrokerBrokerMarket makerRegistered SecuritiesTraderForeign DealerMarket ControllerA member of the South African Institute of Stockbrokers, who is a sole proprietor, apartner in a partnership or an executive director of a corporate entity, or who is anemployee of a member.JSE Securities Exchange member firm providing advice and dealing services to thepublic. It can also deal in its own account – which is referred to as a principal.A broker/dealer, who is prepared/obliged to buy and sell specified securities.An employee or sole proprietor, or partner of a broking member registered with theJSE, who is authorized by such member to enter and execute orders, and report tradesto the JSE trading system on behalf of such member.A person or corporate body, who does not reside in South Africa and whose regularbusiness in such country is the buying and selling of securities.The person appointed by the JSE to supervise, administer, and control the dailyoperations of the JSE trading system.Trading on the JSEThe JSE is a core order-driven market. All transactions in securities in the secondarymarket are conducted with the JSE trading system SETS. In order to facilitate tradingthe JSE trading system has been divided into several functional segments. Thesegments are determined by a categorization of the stocks and subdivided into five36 www.jse.co.za, 28/12/2005

46groups of similar liquidity (see Figure 12): “Top Companies” (ZA01): Order-driven trading of JSE TOP40 equities; “Medium Liquid” (ZA02): Order-driven trading of medium liquid equities; “Less Liquid” (ZA03): Order-driven trading of less liquid equities includingExchange Traded Funds and the Alternative Exchange; “Specialist Products” (ZA04): Order-driven trade of warrants and investmentproducts; “NSX” (ZA11): Order-driven trade of instruments Namibian and JSE/NSX duallistedinstrument.Within these functional sectors, the same trading schedules and similar trade periodrules are applied. Furthermore, there is a classification of the instruments by priceand volatility, liquidity, and country of issue.

47Figure 12: JSE Market SegmentsThe Order BookThe central order book of the JSE is an order-matching facility where buy and sellorders of the participating members are placed. Orders are competing for executionon strict price and time priority. The order book enables the visibility of full marketdepth meaning all bids and offers can be seen. However, to assure full anonymity,member details of the JSE are disclosed neither before nor after the trade. 3737 This feature has been implemented in order to improve market fairness and to adjust trading on theJSE with European trading standards.

48Order TypesGenerally, there are two types of orders, which can be placed in the order book:market orders and limit orders. Furthermore, they may be subject to either executionconstraints or validity constraints as indicated in Table 17.Table 17: Order types at the JSEOrders types Acronym Execution condition Trading PhaseOrders w/oPrice LimitOrders withPrice LimitMarket OrderLimit OrderMO None Call AuctionAA Execute and Eliminate Continuous TradingAB Fill or Kill Continuous TradingLO None BothAA Execute and Eliminate Continuous TradingAB Fill or Kill Continuous TradingOrders that do not have any execution constraints (MO and LO) are termed persistentsince they remain in the order book until they are either executed, cancelled or theyexpire. Orders that do have an execution constraint (AA and AB) are automaticallycancelled if not immediately executed after entry into the order book. Therefore, theyare regarded as non-persistent orders.Validity ConstraintsFor orders, which are not subject to execution constraints the JSE allows for validityconstraints. When orders are entered, a participant can specify how long the order isvalid for: “Good-for-Day”; “Good-till-Date” orders expire at the end of the trading day of a specified date.The date specified may be up to a maximum of 90 calendar days (including thecurrent trading day); “Good till Time” orders expire at a specified time during the current trading day;and; “Good-till-Date-and-Time” orders expire at a specified time on a specified date.This date may be up to a maximum of 90 calendar days (including the currenttrading day) in the future.

49Order Entry ParametersThe rules of the JSE determine the information content of the orders entered into theorder book. They have to contain: In order to reveal the real trading interest, it has to be indicated whether an Agentor Principal is trading; The valid BDA account number (client account reference number), to which anyassociated trades will be booked; The order expiry date has to be specified; the maximum number of days that anorder can remain on the book is 90 calendar days including the current tradingday; The Institutional identification number (where applicable); The volume of shares associated with the order; The ISIN code – the unique international numbering code allocated to each listedsecurity by the JSE and the JSE alpha code; the unique code allocated to eachsecurity by the JSE; The identification number of the trader, the TraderID.Furthermore, the order has to meet the following requirements: The lot size of an order is one share; The tick size is one share; The currency is South African cents; The CX Flag, which is used to indicate that the member has traded out of aclient's account; If the trade has been conducted by a non-resident investor the foreign currencyindicator has to be indicated.Order ModificationThe functionality of order modification allows users to change the price and thevolume of an existing order even though they were already entered into the orderbook. They can be modified without losing price/time priority because they do nothave to be cancelled and re-entered. Changing the order to be greater than themaximum size causes a rejection of the modification; changing it to be smaller hasno effect.

50The Trading DayTable 18: Opening Hours of the JSETrading Days Time frame Time zoneMonday to Friday excluding public holidays 08. 30 to 18. 00 GMT + 02:00 hoursFigure 13: Trading Phases of the JSE08. 30 -08. 35 08. 35 – 09. 00 09. 00 – 16. 50 16. 50 – 17. 00 17. 00 – 18. 00OpenOpeningauctionContinuous tradingLiquidity IntradayAuctionVolatilityAuctionVWAPClosingauctionPost-traderun-off12. 00 – 12. 15Table 19: Trading Period Time Description JSETrading Period Time DescriptionOpen 08. 30 – 08. 35 This is a systemic period, during which all orders that have expiredovernight will be removed from the system.Opening auction 08. 35 – 09. 00 The opening auction consists of two phases, the call phase and theuncrossing phase. During the call phase LO and MO may be entered,modified, and deleted. Information on the state of the order book isprovided throughout the call period but no execution occurs. During theuncrossing phase, the auction price is determined and book is uncrossed.Continuous trading 09. 00 – 16. 50 types LO, AA, AB being entered (no market orders without executionContinuous order entry and execution occur with a wide variety of orderconstraints).Trading Period Time DescriptionPrice volatilityauctionIntraday liquidityauctionRandomThis period is entered when instruments in the ZA01 and ZA02 segmentsbreach their specified volatility bands. As in all auctions, this periodconsists of a call phase when orders are entered for the auction and anuncrossing phase when the uncrossing algorithm is run and orders areexecuted where possible.Instruments in functional segments ZA03, ZA04 and local NSXinstruments in ZA11 are subject to an intra-day liquidity-focusing12. 15 – 12. 30 auction. As in all auctions, this period consists of a call phase whenorders are entered for the auction and an uncrossing phase when theuncrossing algorithm is run and orders are executed where possible.Closing VWAP 16. 40 – 16. 50 The closing VWAP is calculated over the last ten minutes of continuoustrading and should not be confused with the general VWAP that iscalculated throughout the trading day. This VWAP calculation is usedfor closing price determination if no closing price could be determinedduring the closing auction.

51Closing Auction 16. 50 – 17. 00 The closing auction occurs over the last ten minutes of the trading day.As in all auctions, this period consists of a call phase when orders areentered for the auction and an uncrossing phase when the uncrossingalgorithm is run and orders are executed where possible. The pricedetermination from this auction is used to calculate the closing price.Post trade run-off 17. 00 – 18. 00 This period is used for general 'housekeeping' activities, orders may bemodified or cancelled, trades may be modified or reported. No orderentry may take place in this phase and no automatic execution will occur.At 18h 00 , systemic closure of the trading system and official end to thetrading day.Trade Reporting 08. 30 – 18. 00 Reporting of late trades must, however, be entered by 08h45 on theTrade reporting may take place at any time during the trading day.following trading day.Settlement T+5Settlement will occur five days after trade (T+5), no special terms (e.g.same day settlement) will be allowed.At the JSE, all auctions follow a similar process whether it is an opening auction,intra-day auction, volatility auction or closing auction. The JSE centrally calculatesthe indicative auction price and the volume with the auction algorithm, disseminatingin real-time throughout the auction. Following the call phase, there is a thirty secondrandom period, after which the system determines if auction extensions have to beinitiated. The system checks whether executable market order volume remainsunexecuted after the auction or if the auction price compared to the last order bookprice is outside the volatility bands for that instrument.If no extension phase is required the auction algorithm will run during the pricedetermination phase. Having defined the auction price, the order book then will beuncrossed. During the matching process, market orders will be given preference overlimit orders. If there is no execution for market orders they are carried over intocontinuous trading. Then, they are vulnerable to every opposite order enteredregardless of price.In order to make the start of the next trading phase unpredictable, and thus minimizemarket manipulation, the continuous auction starts at a random time. After theauction call period, a random period will occur, which lasts for a maximum of thirtyseconds.

52Matching and uncrossingAs already mentioned, an algorithm runs in order to determine the indicative priceand volume. All orders entered during the auction call are used to calculate the pricebased on the principles shown in Table 20.Table 20: Auction Algorithm Principles of the JSEMaximum ExecutionMinimum SurplusMarket PressureReference PriceThe highest executable volume for each possible price (i.e. the minimum of the buy andsell executable volumes at any given price).The lowest surplus for each possible price (i.e. the smallest difference between the buyand sell executable volumes at any given price).Should the market pressure be on the buy side (the buy executable volume is greater thanthe sell executable volume), the highest possible price will be the auction price. Shouldthe market pressure be on the sell side, the lowest possible price will be the auction price.The auction price will be the possible price closest to the reference price.While the auction algorithm is running, no orders can be entered, deleted ormodified. The orders are executed at the price determined by the uncrossingalgorithm before the ones, who entered the order are informed by a messageconfirming that execution has occurred and providing information about the tradeconditions such as price, total volume, and trade type.Order SizesThe JSE determines the maximum order size by a multiple of the Normal MarketSize 38 (NMS) per instrument and for every market segment. The minimum order sizeis one share. Hence, there is no restriction of the value of the trade size but of thevolume. Table 21 shows the maximum order size of the respective market segmentsat the JSE.38 The NMS of each instrument is disseminated as part of public information; it is calculated over atwelve-month period and re-evaluated on a quarterly basis or as determined by the JSE.

53Table 21: Maximum Order Sizes at the JSESegmentZA01ZA02ZA03ZA04ZA11Maximum Order Size10 x NMS20 x NMS10 x NMS10 x NMS99999.99 x NMSVolatility AuctionTrading on the JSE is governed by dynamic thresholds. The volatility auction as anautomatic trading interruption is used to maintain orderly price formation. It ischaracterized by a five minute halt of execution in a specific share, which gives themarket the opportunity to respond to the price movement and the market participant,who entered the order the opportunity to re-assess the order. It is automaticallytriggered when the price exceeds the volatility band, which is a percentage of theprice last traded (see Figure 14 and Table 22).Orders that allow for partial execution such as execute and eliminate orders enteredduring continuous trading are filled as far as possible within the volatility band. Oncethey have breached those bands they then move into a volatility auction with theoutstanding volume only. On the contrary, execution of fill or kill orders enteredduring continuous trading, where a part of the order will be filled from outside thevolatility bands, is rejected. No volatility auction will be triggered. During theauction period, only market orders and limit orders without execution constraintsmay be entered.

54Figure 14: Volatility Bands at the JSETable 22: Volatility Bands of the specific Market Segments at the JSETrading Phase ZA01 ZA02 ZA03, ZA04 and ZA11Opening Auction 10% 20% No Price MonitoringContinuous Trading andOther Auctions5% 10% No Price MonitoringTrading HaltsIn addition to the automatic trading halts described above the market controller andany other member of the JSE Executive may impose discretionary trading halts inorder to ensure an orderly market. If the market controller has the opinion that a fairand realistic market does not exist the market in a security will be closed. A fair andrealistic market is not assured after inspection of a certain “percentage of brokingmembers is not able to access the JSE systems, the reasons for such lack of accessand their contribution to price formation” (JSE 2004, p. 22, Rule 5.50.5). One reasonfor a lack of access is a failure to the JSE system.Following the ascertainment that an orderly market cannot be assured, the JSEExecutive may:

55 Reduce or extend the hours of operation of the JSE system for any particularbusiness day; Halt or close the JSE system for trading at any time and for any period; Suspend automated tradingTransactions that are effected by system malfunction or an event mentioned aboveare void. During a trading halt, no broking member may trade that listed security forthe duration of the trading halt but may submit orders to and delete orders from theorder book.Trade CorrectionIf transactions are executed in error, the JSE offers the possibility of trade correctionknown as contra 39 and post contra 40 trades. These may only be considered inexceptional circumstances and if the trade meets at least the following requirements: The ‘Director: Surveillance’ has to receive the request within 20 minutes from thetime of the erroneous trade; and The price of the trade to be requested is different more than 5% of the referenceprice immediately before the erroneous trade occurred, or if there is no referenceprice on that day, of the previous day’s closing price; and The difference between the aggregate value of the trades that breach the 5% of thereference price and the value that would have resulted executing such trades isR50 000 or more; or The quantity of shares traded in the respective transaction exceeds 5% of theissued share capital of that security.39 "Contra trade" is a transaction to correct an erroneous trade that is equal and opposite to apreviously matched automated or auction trade entered on the same business day as the original trade.40 "Post contra trade" is a contra trade entered on the business day following the original trade.

57Table 24: Market Types and Order Books at the NSEMarket TypesNormal MarketOdd Lot MarketAuction MarketSpot MarketOrder BooksRegular Lot BookContains all regular lot orders except “All or None”, “Minimum Fill” or “Stop Loss”.Special Terms BookOrder with execution conditions “All-or-None” or “Minimum Fill”.Negotiated Trade BookContains all negotiated order entries captured by the system before they have been matchedagainst their counterparty trade entries. These entries are matched with identicalcounterparty entries only.Stop-Loss BookStop Loss orders are stored in this book till the trigger price specified in the order is reachedor surpassed. When the trigger price is reached or surpassed, the order is released in theRegular lot book.Odd Lot BookThe Odd lot book contains all odd lot orders (orders with quantity less than marketable lot)in the system. These orders do not have any special terms attributes attached to them.Auction BookThis book contains orders that are entered for all auctions. The matching process for auctionorders in this book is initiated only at the end of the solicitor period and for settlementrelated reasons.Spot BookThe Spot lot book contains all spot orders (orders having only the settlement perioddifferent) in the system. The system attempts to match an active spot lot order against thepassive orders in the book. Currently the Spot Market book type is not in use. These ordersdo not have any special terms attributes attached to them and are currently not in use.Order TypesOrders, which can be entered in the trading system, are broadly classified into threecategories: three categories: Price-related conditions including market orders, limit orders, and “Stop Loss”(LS) orders, which are limit orders that get activated and enter the market not untilthe market price of the security reaches or exceeds a threshold price; Time related conditions comprise, “Good-for-Day” (DAY), “Good-till-Cancelled” (GTC), “Good-till-Date” (GTD), and “Immediate-or-Cancel” (IOC)orders; and Quantity related conditions such as “Disclosed Quantity” (DQ), which allowsdisclosing only a specified part of the order quantity to the market. Following itsexecution, the next part is released waiting to be filled (=hidden order).The following quantity related orders are currently not available on the NSE 44 :44 As of 20/03/2006

58 “Minimum Fill” (MF) orders allow specifying the minimum quantity by which anorder should be filled. “All-or-None” (AON) orders specify that only the full order should be executed. Ifthe full order is not matched it will stay in the books till matched or cancelled.The Trading DayFigure 15: Trading Phases of the NSE09. 55 – 15. 30 15. 50 – 16. 00Continuous tradingClosing sessionTable 25: Trading Period Time Description NSETrading Period Time DescriptionContinuousTrading09. 55 – 15. 30 Orders are accepted and collected in the order book, following thecalculation and publication of the indicative opening price, whileapplying the auction procedure. In the pre-opening phase no transactionsare made.Closing session 15. 50 – 16. 00 Following normal market hours the investors have the opportunity toclose their trading positions in the post-losing auction. 45Settlement T+2 Settlement will occur two days after trade (T+2).Until the 9th of June 1999 (Camilleri and Green 2004) call auctions alongsidecontinuous trading dominated trading on the exchange. For the purpose of anexperiment, the the NSE suspended opening and closing call auctions, while othermarket protocols and arrangements remained unchanged.Trading HaltsThe NSE applies an index based market-wide circuit breaker system at three stagesof the index movement. Movement of either the S&P CNX Nifty or the SensexIndex, causing a coordinated trading halt in all equity and equity derivatives marketsin India, triggers the breakers.45 http://www.rediff.com/money/2003/jun/25nse.htm, 24/03/2006

59The three stages of price variation limits are:Table 26: Variation Limits at the NSEVariation Limit Time of breech Action+/-10% before 13. 00 one-hour trading halt13.00 - 14. 30 trading halt for ½ hour14. 30 and after no trading halt+/-15% before 13. 00 two-hour trading halt13. 00 - 14. 00 one-hour trading halt14. 00 and after Halt for the remainder of the day+/-20% Halt for the remainder of the dayAdditionally, the NSE sets individual price bands such as Daily price bands of +/-2% on a set of specified securities, Daily price bands of +/-5% on a set of specified securities, Price bands of +/-20% on all remaining securities.

604.3 The São Paulo Stock ExchangeIn this paragraph, the rules and market structure of the São Paulo Stock Exchangewill be highlighted based on BOVESPA’s Operational Procedure Manual 2005(BOVESPA 2005c) and on the theory worked out in Chapter 3.Market ParticipantsTable 27: Market Participants of BOVESPAClients Individual Investor Clients: individuals, Non-Financial Corporations and InvestmentClubs; Institutional Investor Clients: Mutual Investment Funds, Private Pension Funds,insurance Companies and others; and Financial Institution Investor Clients: Financial Institutions’ owned portfolios.Brokerage firmsTradersMarket makersTrading OfficialInstitutions authorized by the Central Bank of Brazil and the Brazilian Securities andExchange Commission to execute trades on different markets, including securities andbonds. Firms may trade in either their own account or on behalf of their customers.Specialized professionals, who execute trades on BOVESPA on behalf of the brokeragefirms they represent. Traders may or may not enter into an employment contract withbrokerage firms. The number of traders per brokerage firm accredited to deal on BOVESPAis directly related to each firm’s quantity of membership seats. Each seat may have fourelectronic terminals.The “market makers are not mandatory in the Brazilian market” (BEST, 2005b p. 24); theirrole may be performed by trading members, non-member-broker dealers, investment banks,and all-purpose banks that manage investment portfolios. There are two forms of marketmakers: The Independent Market Maker is committed to make the market without being linkedto the issuing corporation or with its holders/major shareholders. The Contracted Market Maker has signed an agreement with the issuing corporation,holding group, affiliates or any shareholder to make the market for a given security. 46Bid and ask quotes entered by market makers compete on equal basis with the orders set byclients; hence, they do not have any privileges concerning execution or visibility (MarketProfile, 2005).BOVESPA official in charge of managing the electronic trading systemOrder BookOn BOVESPA trading is executed fully electronically through an order-driventrading system called MEGA BOLSA. The trading mechanism is based on the NSCsystem developed by Atos Euronext. 47 The order book is organized and executed46 http://www.bovespa.com.br/Market/MarketMarkers.asp#7, 21/01/200647 Atos Euronext provides IT services to exchanges. The trading solution NSC is implemented in 17countries worldwide, including the Warsaw Stock Exchange, the Dubai International FinancialExchange, just to name the ones being analyzed.

61according to price/time priority and provides full transparency, displaying all ordersbefore trade in real time. After trade, BOVESPA disseminates all market dataassociated with these trades through its market data feed facility.Order and Offer TypesAt BOVESPA, there are different order types through which clients order abrokerage firm to buy or sell assets. These orders have to be in accordance with oneor more of the following types (Table 28). Furthermore, traders for a certainbrokerage firm place bid or ask offers, through which they show their intention tobuy or sell assets or rights attached to them under conditions specified by the client.Alongside market and limit orders, and limit offers, the BOVESPA accepts severalothers.Table 28: Order and Offer Types at BOVESPAOrder TypesOffer TypesManagedOrdersThe investor specifies only the amount and thecharacteristics of the securities or rights hewishes to buy or sell. The execution of theorder will depend on the brokerage firm’sdiscretion.The bid or ask offer is to be executed at theopening price of an auction or pre-opening andpre-closing phase.OpeningPrice OfferDiscretionaryOrdersFinancingOrdersThe manager of a securities portfolio or anagent representing more than one clientdetermines the conditions, under which theorder is to be executed. Once executed, theorder placer will indicate the name of theinvestor (or investors), the amount of stocks,and/or securities to be attributed to each ofthem, and the price.The investor requests the purchase or sale of asecurity or a right on a certain market and,simultaneously, the sale or purchase of thesame security or right on the same market oron another BOVESPA managed market, witha different settlement date.This type of offer is only available for thecontinuous trading phase and is to be fullyexecuted regardless of the execution price (nolimit price).This offer is based on a certain trigger price; atthis price and above for a bid offer and at thisprice or below for an ask offer. A stop limitoffer becomes a limit offer as the trigger priceis reached.Offer at any PriceStop OfferTrigger PriceStopOrdersThe client specifies the price of an asset orright, which must be reached for the order tobe executed.This type of offer to be executed at the bestlimit of the offsetting price on the marketwhen it is registered.MarketOfferMatchedordersThe execution of the order is connected to theexecution of another order from the sameclient.Simultaneous registration of two crossedoffers registered by the same brokerage firm.DirectOffer

62Instead of registering orders, the BOVESPA may use a recording system to keeptrack of all communications between clients and their trading desk providing: A Record of every call including the date and start time; Client identification, if applicable the one of its agent and the brokerage firm’strader; The order attributes, if buy or sell and its type; The effective period of the order; Quantities and prices of the assets, if applicable; Control over all records made each day.Order RoutingBOVESPA provides facilities available for individual and institutional investors tosend orders directly to its order book. Member brokerage houses can offer anautomatic and direct access to the BOVESPA’s MEGA BOLSA trading systemusing different routing alternatives: Retail investors may use a gateway for internet access known as Home Broker.Individuals are allowed to send orders via the internet accessing their brokeragefirm’s website. Institutional investors may send their orders directly to the order book through asimilar mechanism known as Institutional Connection.In addition to the order routing possibilities, BOVESPA adopted a Straight ThroughProcessing (STP) concept, through which the entering of the order, its execution, toits final and irrevocable settlement is conducted fully electronically. Investors willingto trade have to “be previously registered and authorized by the brokerage firm andeach trade has to be identified with the investor identification code. BOVESPA doesnot establish any technical limits (minimum or maximum) for the orders;nevertheless, each Brokerage Firm has the ability to establish specific trading limitsaccording to the credit limits for each investor” (BEST, 2005b, p. 24).

63The Trading DayTable 29: Opening Hours of BOVESPATrading Days Time frame Time zoneMonday to Friday excluding public holidays9. 45 to 18. 30 GMT - 03:00 hours10. 45 to 19. 30 GMT - 04:00 hours 48Figure 16: Trading Phases at the BOVESPA10. 45 – 11. 00 11. 00 – 18. 00 17. 55 – 18. 00Pre- OpeningFixingContinuous TradingClosing callTable 30: Trading Period Time Description BOVESPATrading Period Time DescriptionPre-Opening Fixing 10. 45 – 11. 00 The regular trading session starts with a fifteen-minute pre-openingphase. Orders are placed in the system to establish the theoreticalopening price (“opening call”). The opening price of the stocks nottraded during this pre-opening phase will be the price of the first tradeof the day on the trading session.Continuous Trading 11. 00 – 18. 00 forward, futures, and options markets. There are three different tradingThe continuous trading session comprises all securities on the cash,types: offer trading, direct trading, and auction trading.Closing Call 17. 55 – 18. 00 five minutes of trading. The closing call determines the closing pricefor all stocks traded on the cash market comprising BOVESPA indicesThe regular trading session ends with a “closing call” during the lastportfolio and option series with higher liquidity.Settlement T+3 Settlement will occur three days after trade (T+3) (BEST, 2005b)In addition to the regular trading session, the BOVESPA offers trading outside theregular session on the After Market. For trading after regular hours only cash marketoperations are authorized and only stocks, whose prices were already determined inthe regular session. Trade corrections are allowed until 19. 30 after a trading day.48 Due to the Brazilian Daylight Saving Time (GMT -04:00) trading on BOVESPA is one hour laterduring October to February.

64Continuous Trading in the Electronic Trading SessionTransactions in the electronic trading sessions may be carried out by BOVESPAbrokerage firms and by other participants especially authorized by BOVESPA’sboard (BOVESPA 2005b).The sessions operate through bids and ask quotes, which are registered in theelectronic trading system. Additionally, auctions may be executed in the electronictrading session under regular and special rules. The different types of trading can bedescribed as indicated in Table 31.Table 31: Trading Types on BOVESPAOffer TradingDirect TradingAuction TradingSource: BOVESPA (2005b)Takes place whenever traders show their intention to buy or sell an asset. Execution is putthrough by price/time priority. Offers entered into the electronic trading system may specifythe asset, lot, price and the effective period. They are displayed in order of price, and if thesame, in chronological order. Traders may cancel or modify offers as long as not entered intoauction.Refers to trading, in which the same brokerage firm intends to buy and sell the same asset fordifferent investors. If the direct trading meets any parameters determined for direct tradeauctions, trading will be closed after a period set by BOVESPA.May be carried out in two ways: regular and special auction. In regular auction trading sellersand purchasers may intervene while observing the criteria of intervention. Special auctiontrading is executed separately from others, only buying traders may intervene observing thecriteria for intervention.Trading InterventionGenerally, no trade may be closed at a lower price (buy) or higher price (sell), ifthere is any better buy and sell offer. However, there are automatic tradinginterventions causing auctions, which can be summarized as follows: Quantity limit:▫ Trades with a lot 5-10 times the average traded over the last 30 sessionscause an auction with a 5-minute deadline;▫ Trades with a lot more than 10 times the average traded cause an auctionwith a 1 hour deadline. Price fluctuation limit: A positive or negative variation of at least 3% on the lastprice of the securities most traded during the last quarter causes an auction withina certain period. Tradability: A stock not traded over the last 5 sessions or for the first day causesan auction within 15 minutes.

65Additionally, there are special auction cases in order to maintain a fair and orderlymarket. Whenever any relevant information affecting a certain stock is announcedand in case of brokerage firms having technical problems, BOVESPA may put thetrading of such asset up to auction.In all those cases, BOVESPA will interrupt trading on the specific stock and start anauction according to the variation observed. The price established in the auction isregistered and trading on the stock resumes.In addition to automatic trading interruption, the Trading Official may determine anoperation being put up for auction if he believes at his own discretion that the size ofthe lot to be traded exceeds the quantity viewed as normal or in order to ensure pricecontinuity.Price Discovery in the AuctionTable 32: Price Discovery in the Auction Phase at BOVESPAFixing RulesFirst criterionSecond criterionThird criterionPriority at theopening of anauctionThe price attributed to an auction is the one, at which the largest quantity of thestocks is traded.If there is any tie in the quantity traded at two or more prices, two prices areselected, the least imbalanced sale and least imbalanced purchase. The priceattributed to the auction may be equal to one of these prices, or between them; theprice nearest to the last trade is chosen, or if the security has not been traded duringthe day, the price chosen for the auction will the one nearest the last closing price.If the two criteria above lead to a tie, the price selected for opening the auction willbe a part of a scale of prices that may or may not include limit prices depending onthe amount of imbalance.Opening price offers have highest priority.Limit offers by price order and chronological entry order.Auction ExtensionAuctions may be extended, if there is a change in the theoretical price or quantity, aregistration of a new offer that modifies the quantity taken up of a previouslyregistered offer, or changes in the balance not taken up. Hence, during an auction, ifthe price reaches the limit of 100% above the initial price or 50% below it, tradingwill be interrupted and extended for 15 minutes to announce the new price to themarket as long as this interruption takes place within the scheduled session hours.The duration of an extension is illustrated in Table 33.

66Table 33: Criteria for Auction Extension at BOVESPACriterion1 st Extension If there is any change in one of the four criteriawithin the last two minutes (inclusive);2 nd Extension If there is any change in one of the four criteriawithin the last 30 seconds (inclusive);3 rd Extension If there is any change in one of the four criteriawithin the last 15 seconds (inclusive);Extension TimeExtension for 1 further minute (5minutes for the closing call period)Extension for 1 further minuteExtension for 1 further minuteTrading HaltsIn addition to interventions causing an auction described above, there may beinterruptions in the electronic trading system’s operations. BOVESPA may suspendtrading in a certain security, if there is any interruption for technical reasons, whichaffects several brokerage firms. After the system is restored, a “pre-opening” periodwill be initiated, so that brokerage firms may cancel or modify offers registered priorto the interruption. If the interruption is during the last 30 minutes of trading, thesession may be extended upon the decision of the CEO in consultation with the ITDepartment.In case of a large market decline, BOVESPA introduces the circuit breaker providingprotection against excessive volatility during atypical phases on the market. If themarket declines 10% in relation to the closing level of IBOVESPA 49 of the previousday, trading on all BOVESPA markets will be interrupted for 30 minutes. Anadditional trading halt of 1 hour is determined by a decline of the index of more than15% in relation to the previous day’s closing level.The rules governing trading halts are not applicable during the last half hour of thetrading session. If any trading is interrupted during the second to last half hour of asession, at the time trading are resumed, the schedule will be extended for at mostfurther 30 minutes without any further interruption in order to ensure a final tradingperiod of 30 consecutive minutes. Trades registered after the identification of thelimits stated above will be cancelled.49 IBOVESPA is referred to the BOVESPA index, comprising 50 stocks that trade on the exchangeand is basically designed to be an indicator of the average market performance.

67Table 34: Discretionary Trading Halt Statistics Reported by BOVESPAPeriod January 2000/ October 2001Number of halts 594CausesDuration(Days average bycategory)Dividends/Right Announcements 47%News Pending 21%Delisting 17%Other 10%Dividends/Right AnnouncementsNews PendingDelistingSource: IOSCO (2002)0,4 day3,2 days15,5 daysTrade CorrectionsThe Trading Official at BOVESPA authorizes any correction and cancellation oftrades as long as prices in the opening, maximum, minimum or closing prices areaffected, or any substantial change in the quantity traded is observed. Trades arisingfrom auctions, pre-opening, pre-closing, and closing calls cannot be cancelled.

684.4 The Shanghai Stock ExchangeSecurities listed on the SSE fall into three categories: stocks, bonds, and investmentfunds. Stocks are further divided into A-shares and B-shares. A-share stocks areavailable for local investors, and only B-share stocks are available to foreigninvestors. Due to the concern that capital flows might destabilize the market, Chinarestricted access by foreign investors establishing separate classes of shares fordomestic Chinese residents and for foreigners (Fernald and Rogers 2000). 50Order BookThe SSE is a pure limit order book market, executing with strict price/time priority(Li Wei 2002). A central feature of a pure limit order book market is the absence ofdedicated specialists and market makers (FG2004). Liquidity on the SSE is providedby market participants who place limit buy and sell orders in the order book, whichare openly declared via the computer system. The unexecuted portion of the ordersplaced corresponds to the source of liquidity. Research (Li Wei 2002) indicates thatin the early morning large orders are entered into the limit order book, suggestingthat large institutions play the role of a “voluntary market maker” (Li Wei 2002, p.2).The electronic trading system used at the SSE has been established through atechnology partnership between Deutsche Börse AG and Accenture adapting theautomatic auction system Xetra from the Deutsche Börse AG (Reporter online2004).Order TypesThe only orders that are supported by the trading system are limit orders to buy andsell (Li Wei 2002). Orders are valid on the day they are placed. If full execution ofthe order is not possible the remaining portion continues to participate in groupauction throughout the day or may be cancelled.50 If not otherwise stated, the findings in this chapter are based on information publicly available onthe SSE Web site, http://www.sse.com.cn, 23/01/2006.

69Order Entry ParametersThe rules of the SSE determine the information content of the orders entered into theorder book. They have to contain: The type of transaction, The quantity to be bought or sold, The prices, and Other prescribed factors.Order RoutingB-Share investors can select one or several routing venues provided by theirsecurities agents. Generally, order methods include: Desk to desk trading booth orders: Investors themselves or their designated agentspersonally go to the B-Shares trading booths of securities departments to completeorders. Self-service orders: instructions for the trading of securities to a broker via phoneorders, online orders and self-service terminal orders.

70The Trading DayTable 35: Opening Hours of the SSETrading Days Time frame Time zoneMonday to Friday excluding public holidays 09. 15 - 15. 00 GMT + 08:00 hoursFigure 17: Trading Phases at the SSE09. 15 - 09. 25 09. 30 – 11. 30 13. 00 – 15. 00Centralizedgroup auctionConsecutive biddingLunch breakConsecutive biddingTable 36: Trading Period Time Description SSETrading Period Time Descriptioncentralized groupauctionConsecutivebiddingConsecutivebidding09.15 – 09.2509.30 – 11.3013.00 – 15.00The largest trade volume determines the price-level. Buy orders higher,and sell orders lower than the price-level are executed. The price of thefirst transaction refers to the opening price. After an opening price isgenerated according to centralized auction, orders that are not executedare still valid and automatically enter into consecutive bidding accordingto the original sequence of orders.Continuous execution of orders:▫ Buying and selling price match;▫ The buy (sell) order is higher (lower) than the lowest (highest) sell(buy) order, the price level is determined according to the currentlydisplayed lowest (highest) sell (buy) order.Lunch breakContinuous execution of orders (see above)The closing price refers to the volume weighted average price of alltrades in a minute before the last trading of this security on that day(including the last trade). If there is no concluded transaction on that day,the previous closing price is used as the day's closing price.SettlementT+1 Settlement of A-shares will occur the next day trade (T+1)T+3 Settlement of B-shares will occur the three days after trade (T+3)

71Trading unitsPrices of B-shares on the SSE are calculated in US dollars. The minimum unit ofchange for a buying or selling price is US$ 0,001. Trading volume is based on lots of100 shares whereas odd lots of less than 100 shares can be sold during trading timebut cannot be bought.Price Variation LimitsTrading of A-shares, B-shares, and securities investment funds is subject to a daily10% stop-buying limit and a 10% stop-selling limit, with the exception of first daylisting. Only orders within the price variation limits are valid.If trading of B-shares is without price change limits, the price of orders is not limitedduring centralized group auction. During consecutive bidding, orders that meet thefollowing conditions are valid: The price of the order for buying (selling) a share is not higher (lower) than theprescribed extent of the lowest (highest) selling order price currently displayed. If no buying (selling) order price exists the order price for buying (selling) a shareis not higher (lower) than the prescribed extent of the highest (lowest) buyingorder price currently displayed. In case no orders are entered, the order price of buying (selling) a share is nothigher than prescribed extent of latest concluded price. Where there is no latestconcluded price that day, the limit price is calculated according to the previousclosing price. If necessary, the SSE can carry out adjustments to the above rangesand announce them to the public.

724.5 The Istanbul Stock ExchangeIn this paragraph, the market design of the Istanbul Stock Exchange will beelaborated, based on the theory worked out in Chapter 3 in addition to theinformation on the ISE Web site. 51Stock Markets of the ISEThe ISE has five different stock markets (see Table 37). The stocks are allocated tothe respective market meeting its requirements.Table 37: Stock Markets of the ISEMarket Description Trading HoursNational MarketSecond NationalMarketNew EconomyMarketWatch ListCompaniesMarketWholesaleMarketAll companies included in the National Market fulfill the listingrequirements pre-determined by the ISE. Currently, 100 companiesselected from among the listed companies in the National Market areincluded in the ISE National 100 Index, which is the main index of theISE Stock Market.The “Second National Market” was established with a view topromoting trading in stocks of small and medium size companiesincorporated in all parts of the country, in a reliable and transparentenvironment. The Second National Market consist of companies delistedtemporarily or permanently from the ISE's National Market aswell as companies that fail to fulfill the listing requirements and lackthe necessary qualifications for trading on the ISE's National Market.Companies meeting the criteria for trading on the Second NationalMarket are admitted to this market upon the decision of the ExecutiveCouncil of the ISE.The “New Economy Market” was formed in order to enable tradingstocks with growth potential in an organized market.The "Watch List Companies Market" was established with a view toprovide an organized and liquid market for trading of stocks ofcompanies under special surveillance and investigation due toextraordinary situations with respect to stock transactions and/orcompanies traded on the ISE; disclosure of incomplete, inconsistentand/or untimely information to the public; failure to comply with theexisting rules and regulations as well as other situations leading todelisting of stocks and/or dismissal from the related market temporarilyor permanently in order to protect investors' rights and public interest.The “Wholesale Market” provides for trading of stocks in largequantities and block sales.Morning session09. 30 - 12. 00Afternoon session14. 00 - 16. 3014. 00 - 15. 0011. 00 - 12. 00 .51 http://www.ise.org/, 11/10/2005

73Market ParticipantsISE members authorized to operate at the ISE can be grouped into three differenttypes of investors.Table 38: Market Participants of the ISEClientBrokerage housetrading floorspecialistsIndividual investors (M), Mutual funds (F)Brokerage houses must define for which type of investor they enter orders. In order toexpress the owner of the order they indicate “M”, “F” or “P” (“Portfolio” represents an orderplaced by the broker himself)The task of the trading floor specialist is monitoring the trading acivitySource: Bildik 2004Order BookThe ISE is an order-driven, continuous auction market without market makers orspecialists and opening batch mechanisms (Bildik 2004). The exchange operateswith a fully automated, screen-based electronic trading system. Buy and sell ordersare entered into the electronic order book, where they are automatically matched andexecuted on price and time priority. The order book operating on the ISE provides allinformation regarding transparency, except outstanding order IDs. The best bid, offerand closing prices of stocks and the number of stocks are displayed in the tradingsystem during the sessions.Order TypesThe ISE trading system enables members to execute several types of orders; all ofthem are orders with a price limit. In addition to limit orders, the ISE accepts limitvalue, fill-or-kill, and special limit orders. Furthermore, it provides orders withvarious validity restrictions such as good-till-date, which are valid up to one tradingday. Unmatched orders without a specific validity period are cancelled at the end ofthe trading session.

74Order routingThe buyers and sellers enter the orders into the computer system through theirworkstations located at the ISE building and in their head offices.Lot SizesThe standard lot size is 1 share (1 share refers to 1 YTL nominal).Lot limits specified by the exchange are 250, 500, 1.000, 2.500, 5.000, 10.000 or25.000 lots. The maximum trading limit for an order is YTL 1,5 million/order for alltypes of orders except special orders, which can include shares up to the block tradelimit, referred to 10% of the paid-in-capital. Special orders are not taken intoconsideration as registered transactions, but are included in the calculation of thetraded value and volume of the market.Order ModificationOrders that are not matched during the continuous auction are valid until the end ofthe session or day. The only modification allowed is the price amendment. “Thismeans that investors are only allowed to increase the price of their buy orders and todecrease the price of their sell orders during the trading hours unless the order meetsthe cancellation requirements” (Bildik 2001, p. 10). This is intended to increase theperiod, in which orders remain in the system, and thus provide depth and liquidity(Bildik 2001).

75The Trading DayTable 39: Opening Hours of the ISETrading Days Time frame Time zoneMonday to Friday excluding public holidays 09.30 - 16.30GMT + 02:00 hoursGMT + 03:00 hours from lateMarch to late OctoberFigure 18: Trading Phases at the ISE09. 30 – 09. 45 09. 45 – 12. 00 14. 00 – 14. 10 14. 10 – 16. 30TransmissionperiodContinuous auctionMorning session09. 30 – 12. 00Lunch BreakTransmissionperiodContinuous auctionAfternoon session14. 00 – 16. 30Table 40: Trading Period Time Description ISETrading Period Time DescriptionMorning sessionElectronic ordertransmission period09. 30 – 09. 45 Electronic order transmission period allows for placement oforders by electronic means only.Continuous auction 09. 45 – 12. 00 Cancellation of orders is not allowed.Buy and sell orders are matched in a continuous auctionenvironment according to priority rules based on price and time.Afternoon sessionElectronic ordertransmission periodSeparate session; Electronic order transmission period allows for14. 00 – 14. 10 placement of orders by electronic means only.Continuous auction 14. 10 – 16. 30 environment according to priority rules based on price and time.Cancellation of orders is not allowed.Buy and sell orders are matched in a continuous auctionSettlement T+2 Settlement will occur two days after trade (T+2).Price Variation LimitsThe base price (= reference price) is determined by rounding the previous session'sweighted average price to the nearest price tick. Price margins are generally limitedto 10 % above or below the base price. Upper limits are rounded upwards and lower

76limits downwards with the appropriate price tick.Trading HaltsThe ISE imposes a trading halt mainly due to disclosure of information andannouncements made by listed companies (see the trading halt statistics in Table 41).There is no regular halt mechanism based on order imbalances and volatility (Bildik2001).Based on the disclosure regulations, companies listed on the ISE must disclose thematerial information to the ISE before it has been made publicly available by theexchange. Trading halts initiated due to information disclosure usually last shortperiods of time (15-30 minutes on average) depending on the importance of the news(Bildik 2001).During a trading halt, investors or brokers may cancel or change their outstandingorders, which is not allowed during trading hours. Thus, a trading halt is veryimportant for investors at the ISE and almost the sole opportunity to modify theirorders after the new information comes to the market since there are no balancingperiods or auctions during continuous trading (Bildik 2001).The decision whether a trading halt has to be imposed is at the discretion of the ISEmarket regulators, which is the exchange or the Capital Market Board of Turkey.Trading halts initiated by the SEC usually last longer (up to several days) dependingon the reasons for the halt (Bildik 2001).Table 41: Discretionary Trading Halt Statistics Reported by the ISEPeriod January 2000/ October 2001Number of halts 209News Pending 34%Capital Increase & Dividend/Rights Announcement 22%CausesRegulator 20%Fin Statements 13%M&A 11%Mean3.1 daysDurationMedian0.3 dayMode1 daySource: IOSCO (2002)

774.6 The Warsaw Stock ExchangeIn this paragraph will highlight the rules and market structure of the Warsaw StockExchange based on the theory worked out in Chapter 3 as well as on informationpublicly available on the WSE Web site, if not otherwise identified. 52The WSE is an order-driven market using the Warsaw Stock Exchange Trading(WARSET) system. 53 The WARSET system is a fully electronic platform providingfull automation of order transfer and transaction execution. Furthermore, it facilitatesaccess to the trading system for market participants and disseminates marketinformation.Market ParticipantsMarket Participants of the WSEClientsMarket makersIssuer’s marketmakerBrokersSource: WSE (2000)An investor intending to conclude a transaction on the Exchange must have an investmentaccount with a licensed brokerage house. There are three different kinds of investors: foreigninvestors, individual domestic investors, and institutional investorsA market maker is a brokerage house member of the Exchange which agrees with theExchange to place buy and sell orders for a security for their own account on a permanentbasis and on the terms set out by the Exchange Management Board.The issuer's market maker is a brokerage house - member of the Exchange which agreed withthe issuer to maintain the liquidity of a given stock.Orders are sent to the brokerage house, from where there are transferred to the order bookafter they are verified for accuracy.Order BookThe electronic order book on the WSE is an order-matching facility where buy andsell orders are matched. Orders entered into the order book are competing forexecution on strict price and time priority. The order book enables the visibility ofthe five best bids and offers, taking into account the number of orders and aggregatevolume of the orders at a given price level. (Warsaw Stock Exchange Rules)52 http://www.gpw.com.pl/index_e.asp, 03/09/200553 The WSE trading platform is based on the platforms of the Paris Bourse and Euronext, provided bythe Atos Euronext company.

78Orders Entry ParametersOrders sent to the brokerage house must contain the following information: The type of order (buy or sell order); The price limit, or a type of order without price limit; The order validity date; The name of the security or financial instrument to be bought or sold; The number of securities; Additional requirements for execution of the order.WARSET allows placing different types of orders, and thus applying to differentinvestment strategies. Orders available are categorized in orders without a price limitand orders with price limits as indicated in Table 42 and 43 respectively (WSE2000).Table 42: Orders without Price Limit at the WSEOrders types Acronym Execution condition Trading PhaseOrders w/oPrice LimitMarket Order MARKET NoneMarket onOpeningMust-be-filledordersOPENINGNoneContinuous trading(any phase except balancing)Single-price auctionOpening and close of continuous tradingMarket balancingContinuous tradingMBF None Single-price auction (except interventionand post-auction)Market-on-opening orders are placed during the opening and closing in thecontinuous trading system and the single-price auction system, as well as duringmarket balancing, executing at the opening price, closing price, single price, or pricedetermined during balancing respectively.

79Must-be-filled orders can be placed in continuous trading and in the single-priceauction, with the exception of the intervention phase and post-auction trading. Whenthese orders are placed during the order collection period for the opening, close,single-price auction, and market balancing, they are executed respectively at theopening price, closing price, single price, and price determined during marketbalancing.Table 43: Orders with a Price Limit at the WSEOrders types Acronym Execution condition Trading PhaseOrders withPrice LimitLimit orderMINHIDMinimum size orderHidden orderContinuous trading(any phase except balancing)Single-price auctionOpening and close of continuous tradingMarket balancingContinuous tradingSTOP Stop order Single-price auction (except interventionand post-auction)Minimum size orders specify a minimum portion of an order that has to beexecuted. In a situation, where the order book does not allow an order to be executedat least in the volume specified in the requirement, this order is rejected. Followingpartial execution the unexecuted portion remains in the order book as an order withno requirement of minimum size.Hidden orders are divided into lots, which are executed gradually. Only the lotentered into the order book is visible to market participants. Following the executionof the first portion the next is entered into the book until the order is completed.Thus, the unexecuted portion that is the actual order quantity remains hidden. Indetermining the opening, closing, and single prices, as well as the price determinedas a result of market balancing, the total volume of individual hidden orders is takeninto account.

80Stop orders are displayed only when the indicative opening price or the price of thelast transaction in continuous trading reaches a level specified by the investor. Thus,in addition to the limit, at which they become active, these orders must also containan execution limit (stop price), or a request for execution at any price.Order SpecificationsOrders traded on the WSE may have the order specifications indicated in Table 44.Table 44: Order Specifications at the WSEValidityGood-for-dayGood-till-dateGood-till-cancelledFill-and-killFill-or-killAcronymGFDGTDGTCFAKFOKThe Trading DayTable 45: Opening Hours of the WSEOpening Hours every from to Time zoneMonday to Friday excluding publicholidays08. 30 16. 35 GMT + 01:00 hourTransactions on the WSE can be concluded in continuous trading, single-priceauction, or outside the trading session in form of block trades. Hence, there are twodifferent trading sessions.The most liquid stocks, all bond series, investment certificates, futures, options,warrants and index participation units are traded in the continuous trading system. Ifstocks are assigned to continuous trading, corresponding allotment certificates andsubscription rights are also traded in this system. Regardless of the quotation system,the transaction unit is always one security.

81Figure 19: Trading Phases of the Continuous Trading System at the WSE08. 30 – 09. 30 09. 30 09. 30 – 16. 10 16. 10 -16. 20 16: 20 16. 20 -16. 30 16. 30 – 16. 35Pre-OpeningOpeningContinuous TradingPre-ClosingClosingPost-AuctionPre-Opening(for thenext day)Table 46: Continuous Trading Period Description WSETrading Period Time DescriptionPre-opening 08. 30 – 09. 30 calculation and publication of the indicative opening price, applying theOrders are accepted and collected in the order book, following theauction procedure. In the pre-opening phase no transactions are made.Opening 09. 30 Once the opening price is announced it becomes the price at whichtransactions are executed at the opening auction.ContinuousTradingIn continuous trading, the buyer and the seller place orders which, are09. 30 – 16. 10 executed on an on-going basis provided the prices match. Theunexecuted orders are entered into the order book and wait for oppositeorders with a corresponding price to appear to enable the transaction.Pre-closing 16. 10 – 16. 20 on the orders a closing price is determined. However, no transactions areDuring the pre-closing phase orders are placed for session closing. Basedmade.Closing 16. 20 Based on the closing price transactions entered during pre-closing areexecuted at the close of tradingPost-auction 16. 20 – 16. 30 may be placed at the closing price. During the post-auction trading it ispossible to cancel and modify orders placed earlier, if this is done inAfter the closing price is determined additional limit buy and sell ordersorder to execute them at the closing price.Pre-opening 16. 30 – 16. 35 In the pre-opening phase orders are accepted for next session opening.Settlement T+3 Settlement will occur five days after trade (T+3).If the price in the opening and closing exceeds the price variation limits (see below),no opening and closing price is announced and market balancing begins. Duringmarket balancing, buy and sell orders may be placed, while previously placed ordersmay be cancelled and modified. If a price within the price variation limits can bedetermined following market balancing the balancing period stops and the openingor closing price is announced.However, if on the discretion of the session's chairman it is not possible to get a pricewithin the price variation limits, they can be revised or trading stopped. In case of

82trading interruption, a non-transactional opening (closing) price is announced, whichis equal to the upper price variation limit in the case of excessive buy orders or equalto the lower price variation limit in the case of excessive sell orders.Figure 20: Trading Phases of the Single-price Auction System at the WSE08. 30 – 11. 00 11. 00 -11. 15 11. 15 11. 15 -11. 45 11. 45 -14. 45 14. 45 -15. 00 15. 00 15. 00 -15. 30 15. 30 -16. 35Pre-OpeningInterventionAuctionPost-auctionTradingPre-OpeningInterventionAuctionPost-AuctionTradingPre-Opening(for the next day)Table 47: Single-price Auction Trading Period Description WSETrading Period Time DescriptionPre-opening 08. 30 – 11. 00 Orders are accepted and collected in the order book, following thecalculation and publication of the indicative opening price, whileapplying the auction procedure. In the pre-opening phase no transactionsare made.Intervention 11. 00 – 11. 15 Following the pre-opening phase, interventions may be undertaken,which are modifications of previously placed orders to increase theliquidity of a given security and reduce market imbalance (if any).Allowed modifications comprise: increasing volume, increasing the limitprice on buy orders and decreasing the limit price on sell orders. TheExchange Management Board may decide to call off the interventionphase (WSE 2000).Auction 11. 15 Following intervention the single price is determined using theappropriate algorithm, and orders are executed at the single price.Post-auctiontrading11. 15 – 11. 45 During post-auction buy and sell orders are placed and executed at singleprice determined as result of auction procedure.Settlement T+3 Settlement will occur three days after trade (T+3).The procedure of determining the price and concluding transactions is carried outtwice daily in the single price auction system with two auctions. After the first postauctionphase, the second pre-opening phase on that day occurs, and the secondsingle price of the day is defined for securities traded in the single-price auctionsystem. After publication of this single price, the post-auction phase begins for asecond time that day, before the pre-opening phase for the next day begins.The Auction AlgorithmBy determining the auction price (the single, opening and closing price) the systemuses the appropriate algorithm, which maximizes the turnover volume, whileminimizing difference between the number of securities in sell and buy orders

83executable at a determined price and minimizing difference between the determinedprice and the reference price.Price Variation LimitsIn both trading systems, changes in prices of securities with respect to the referenceprice are limited (see Table 48). In the single-price auction, the reference price is thelast single price for a given security. In the continuous trading system, the referenceprice is the last closing price. In case the opening price has been determined, thereference price is the opening price.Table 48: Price Variation Limits at the WSEContinuoustradingSingle-priceauctionSecurity Reference price Price variation limitShares Closing price +/-10%Shares, allotment certificates for sharestraded in single-price auction systemSubscription rights to shares traded insingle-price auction systemLast single price +/-10%Last single price +/-100%After market balancing, the session chairperson may change the limits for a givensecurity in continuous trading, up to 21% in the case of stocks. The ExchangeManagement Board may permit greater variations.The greatest permissible variation relative to the reference price cannot exceed 21%in the case of stocks if variation limits are extended in the single-price auction. Theremay be an additional limitation of maximum price change during a session. Thesingle price, in the case of the second auction for a given session, may be at most21% higher or lower than the first single price of the day, and no more than 33.1%higher or lower than the last single price of the previous session.The Exchange Management Board determines the procedures for changing of pricevariation limits at its discretion. Moreover, it can also decide to alter or ignorelimitations on price changes for selected securities, or for all of them.

84Table 49: Discretionary Trading Halt Statistics Reported by the ISEPeriod November 17, 2000 to March 21, 2002Number of halts 72CausesDuration(Days average bycategory)Take over bid 72%Issuer report 10%Delisting 7%Other 10%MeanMedianModeSource: IOSCO (2002)2,5 days1 days1 days

854.7 The Dubai International Financial ExchangeIn this paragraph the market design of the Dubai International Financial Exchangewill be elaborated based on the theory worked out in Chapter 3 as well as on theDIFX (2005) Business Rules 4.0 as of the 3 rd October 2005, if not otherwiseidentified. 54Market ParticipantsTable 50: Market Participants at the DIFXCustomersMarket MakersTradersCustomers can be any person that employs the services of a member.The DIFX may but is not obliged to appoint one or more market makers inrespect of a specific admitted security. A member choosing to be a marketmaker shall enter into a Market Maker Agreement, which specifies the details ofthe market making obligations.Agents of a member engaged in trading on DIFX markets.Order BookThe DIFX operates with a central order book to which orders are submitted by itsmembers. The central order book provides anonymous, automated order matching onthe basis of price and time priority. The order book continuously displays the fivebest bid or ask limits, including the number of orders and total disclosed orderquantity at each such limit. DIFX products are traded under a “hybrid system” 55which combines order-driven systems with liquidity provision offered by marketmakers. 56 After a transaction is carried out, the DIFX immediately disseminates thequantity, price, and time of execution of the respective transaction. Orders withoutprice limit are given priority, and in case price limits are equal, priority will be givenaccording to the time of entry.54 http://www.difx.ae/regulation/rules/ approved/DIFX_Business_Rules_03_10_05.pdf, 05/11/200555 By definition of the DIFX, http://www.difx.ae/listing/products/index.html, 20/03/200656 Within the scope of this thesis, however, the trading system is referred to as a order-driven market,in contrast to a hybrid market as defined in Chapter 3.3.5.

86Order TypesAlongside market and limit orders the order book accepts:Market-to-limit Orders: Market-to-limit orders are purchase or sale orders with noprice limit, which, in continuous trading, are executed immediately at the bestopposite price limit (existence of matching order in the opposite side is essential)with any remaining unexecuted portion being automatically transformed into a limitorder at the best opposite price limit and added to the central order book;Market-on-Opening Orders: Market-on-opening orders are purchase or sale orderswith no price stipulations which, in auctions, are executed at the auction price withany remaining unexecuted portion being automatically transformed into a limit orderat the last executed price and added to the central order book;Stop Orders: Stop orders are purchase or sale orders, which are triggered when aspecified transaction price is reached in trading. In the case of a stop loss order, amarket order shall be automatically generated and added to the central order book. Inthe case of a stop limit order, a limit order shall be automatically generated andadded to the central order book;Execution constraintsCertain types of orders defined by the exchange may be made subject to executionconditions (see Table 51).Table 51: Execution Constraints at the DIFXFill-and-KillMinimum-quantityFill-or-KillIceberg or Hidden-sizeExecution to the fullest extent possible either immediately upon entry duringcontinuous trading or at the general matching of an auction, with anyremaining unexecuted portion being cancelled.The specified minimum quantity indicates the portion, which has to beexecuted, with any remaining unexecuted portion being added to the orderbook; provided that such orders shall be cancelled failing immediateexecution of the specified minimum quantity.Immediate and full execution, failing which they shall be cancelled.An order that is executed in specified lots, the unexecuted portion remainsdisclosed to the market for the purpose of hiding the actual order quantityfollowing gradual execution until exhausted.

88The Trading DayTable 52: Opening Hours of the DIFXTrading Days Time frame Time zoneMonday to Friday excluding public and tradingholidays11. 30 - 17. 00 GMT + 04:00 hoursTrading phasesFigure 21: Trading Phases at the DIFX11. 30 – 11. 45 11. 45 11. 45 – 16. 45 16. 45 – 16. 50 16. 50 16. 50 – 17. 00PreopeningOpening auctionContinuous tradingPreclosingClosing auctionTrading-atlastTable 53: Trading Period Time Description DIFXTrading Period Time DescriptionPre-opening 11. 30 – 11. 45 During the pre-opening period orders are entered into DIFX systemsand automatically recorded in the order book without execution.Orders are batched in order to calculate the theoretical opening price.The theoretical opening price is calculated and disseminatedcontinuously. During the last 30 seconds of pre-opening modificationand cancellation of existing orders is not allowed (“no cancellationperiod”).Opening auction 11. 45 represents the price for the opening auction. Once the opening auctionThe last theoretical opening price calculated before matchingis running no changes in the order book may be made.Continuous trading 11. 45 – 16. 45 Continuous matching and execution of incoming orders. Anyremaining unexecuted portion is added to the order book.Pre-closing 16. 45 – 16. 50 As in the pre-opening phase. Orders are batched in order to calculatethe theoretical closing price. The theoretical closing price is calculatedand disseminated continuously. During the last 30 seconds of preopeningmodification and cancellation of existing orders is notallowed (“no cancellation period”).Closing auction 16. 50 The closing auction determines the closing price.Trading-at-last 16. 50 – 17. 00 At the close of a business day orders can be entered for execution atthe last traded price.Settlement T+3 Settlement will occur three days after trade (T+3) 5757 http://www.difx.ae/market_information/calendar.html, 05/02/2006

89The DIFX operates various trading phases and chooses in its sole discretion whetherto operate continuous trading, an auction or a combination of auction trading andcontinuous trading. The DIFX organizes the securities into trading groups. Currently,there are two groups operating: Group 02 and Group 10. Both groups have the sametrading phases and price thresholds but differ in the tick size (see Table 54).Table 54: Tick Sizes for Group 02 and 10 at the DIFXSecurity Price RangeTick SizeFrom $0 to $50: $0.01Group 02From $50 to $100: $0.05From $100 to $500: $0.10> $500 $0.50Group 10 $0.01Source: www.difx.ae/market_information/trading_groups.html, 15/03/2006Trading HaltsIn order to ensure the operation of a fair, orderly and efficient market the DIFX mayin its sole discretion or upon the instructions of the DFSA suspend trading in anysecurity.If an order entered in the order book causes the price of a security to exceed the pricevariation limit for the specific security, DIFX systems suspend continuous tradingfor a certain period, or in auction trading extend the call phase of the auction. Thisvolatility extension consists of a single limited extension in time of the relevantauction’s call phase. The dynamic and static thresholds for Group 02 and Group 10securities are 5% and 10% respectively. 5858 http://www.difx.ae/market_information/trading_groups.html, 15/03/2006

905 ConclusionThe ever-increasing number of empirical research, especially on the major developedmarkets, demands for a comparison of all stock exchanges with regard to theirmarket design and trading mechanisms. Hence, as a part of an international projectcomparing stock exchanges of different segments, the findings presented in thisthesis contribute to groundwork for further research designed and organized in orderto make a statement on market efficiency, and thus on market microstructure theory.Especially emerging markets face the challenges of developing a fair and orderlymarket. However, “a number of emerging markets and many individual privateenterprises are making impressive progress” (IFC 2005, p.18).Although emerging markets improve, differences in trading still exist between theemerging and developed markets (see Table 55).Table 55: Table: Summary Comparison of Trading Halt FrequencySource: IOSCO 2005

91Attention was focused on the market architecture of selected stock exchanges inemerging markets with their full set of rules governing the trading process. One issueheavily discussed is the effectiveness of call auctions against continuous tradingsystems. As Camilleri and Green (2004) state, call auctions provide an efficientmechanism for price discovery mainly for less liquid securities. Continuous trading,however, has the advantage of greater immediacy, and thus is preferablyimplemented in the developed stock exchanges. Due to less liquidity in emergingmarkets, call auctions, in return, may have advantages in comparison to continuoustrading. However, their research on the impact of the suspension of opening andclosing call auctions at the NSE indicated that less liquid stocks do not benefit fromopening and closing call auctions since volatility, efficiency, and liquidity improvedafter their suspension.This paper aimed to identify and analyze some attributes of stock exchanges inemerging markets. Table 56 provides a summary of the key findings worked out inthis thesis. It contains the main aspects for characterizing stock markets with respectto their actual rules and market mechanisms.

92Table 56: Synoptical Table of Market Mechanisms of the selected Stock ExchangesJSE NSE BOVESPA SSE ISE WSE DIFXMarket Participants BrokersDealersMarket makersMarket Structure Quote-drivenOrder-drivenHybridPrice discovery AuctionContinuousTrading System Electronic TradingFloor TradingOrder Book OpenPartially closedClosedOrder Types MarketLimitExecution Conditions StopMarket-to-limitMarket-on-OpeningMust-be-FilledManagedDiscretionaryFinancingMatchedSpecial LimitFill-or-killExecute-and-EliminateAll-or-None *HiddenMinimum Size *Validity Constraint Good-for-DayGood-till-DateGood-till-TimeGood-till-Cancelled* Currently not available (24/03/2006)

936 AppendixThe World Federation of Exchanges issues reliable and comparable market statistics.Its source is the data provided by member exchanges. In order to increase thecomparability of the statistical information a list of definition and calculationmethods has been established: 59Domestic market capitalizationThe market capitalization of a stock exchange is defined as the total number ofissued shares of domestic companies, including their several classes, multiplied bytheir respective prices at a given time. It reflects the comprehensive value of themarket at that time, including common and preferred shares of domestic companiesonly.It does exclude: Investment funds; Rights, warrants, ETFs, convertible instruments; Options, futures; Listed foreign shares; Companies whose only business goal is to hold shares of other listed companies.Value of share tradingThe share trading value is the total number of shares traded multiplied by theirrespective matching prices. The table distinguishes trading value of domestic andforeign shares, as well as investment funds. Figures are single counted (only one side of the transaction is considered). In order to reach a more accurate comparison level, the Federation introduced anew split which distinguishes three main categories of trades according to thefacility / way used to execute the trading operation :59 http://www.world-exchanges.org/WFE/home.asp?action=document&menu=27, 18/02/2006

94Trades effected through the Electronic Order BookThese trades represent the transfer of ownership affected automatically through theexchange’s electronic order books where authorized intermediaries place theorders, generally matched on a price/time basis.Negotiated dealsThese trades represent the transfer of ownership effected through a bilateralnegotiation and involving at least one exchange’s member intermediary (tradesbetween two intermediaries or between an intermediary and a customer). Thesetrades can be executed in a number of ways, including special trading platforms,telephone or other structures, and are reported by the intermediary to theexchange’s authorities. They can be executed and/or reported on systems operatedby the exchange. To be included in the statistical reporting, this activity mustgenerate revenues to the exchange.Other trading activityThis category includes certain trade-related activities. These figures enable someexchanges to complete the picture of their trading activity by restoring the fullchain of transactions. Some of this exchange business is due to local securitieslaws. For these markets, this includes a number of trading or trade-related activitieswhich cannot be reported in the other two sections, and therefore in the total.Examples include stock movements from the clearing centers to facilitate thecompletion of the trading process, or repurchase agreements.Total share turnover is composed of electronic order book and negotiated dealsonly (excluding other trading activity).Number of listed companiesNumber of companies which have shares listed on a specific exchange, split intodomestic and foreign, excluding investment funds and unit trusts. A company withseveral classes of shares is counted just once.Foreign Company: A company is considered foreign when it is incorporated in acountry other than that where the exchange is located.

95Average amount daily turnoverTotal value of share trading divided by the number of trading days during the period.Average value of transactionsTotal value of share trading divided by the number of transactions in equity share.

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102EIDESSTATTLICHE ERKLÄRUNGIch erkläre hiermit an Eides Statt, dass ich die vorliegende Diplomarbeit selbständigangefertigt habe. Die aus fremden Quellen direkt oder indirekt übernommenenGedanken sind als solche kenntlich gemacht.Die Arbeit wurde bisher weder in gleicher noch in ähnlicher Form einer anderenPrüfungsbehörde vorgelegt und auch noch nicht veröffentlicht.Innsbruck, März 2006______________________________gez.