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ISE expects Xetra to bring more investors and trading Back  
The Irish Stock Exchange (ISE) launched its electronic trading system ISE Xetra (pronounced Zee-tra) on 6 June. The new system is a result of a strategic alliance between the ISE and the Deutsche B?rse under which the ISE operates an electronic market for Irish equities on a special segment of the Xetra trading platform in Frankfurt.

With the electronic system, instead of placing phone calls seeking matches for individual trades, an electronic order book will be held into which member firms can enter orders to buy or sell Irish shares. The system then automatically matches the best orders and completes the trades. There is no minimum level of trading for each stock and all DCM stocks are included.

Tom Healy, chief executive of the ISE, says the adoption of ISE Xetra is designed to provide the Irish market with the most modern and advanced trading system possible. It also allows the ISE to participate fully in moving towards a common European market in leading securities. All European exchanges now use electronic trading.

Global visibility
Healy says the introduction of the system will make the ISE more attractive to international investors. ‘ISE Xetra is designed to promote the Irish market internationally through global visibility to investors, and greatly increased transparency of market prices and trading volumes.’ Member firms can be based both in Ireland and abroad. Healy hopes the electronic system will attract foreign-based investment banks to join the ISE, and trade on the Irish market via remote electronic connection. Commerzbank, CSFB and Merrill Lynch, all London-based, have already joined and more are expected by the end of this year.

Mechanics of trading
The mechanics of the electronic trading system are much the same as previously. The trading day begins and ends with an auction phase where member firms assess the market for individual shares at both the opening and close of the trading day. The morning auction phase occurs at 7.50am and lasts ten minutes. The evening auction occurs at 4.28pm and last for just two minutes.

During the auction phase member firms will place orders, specifying price and quantity, and they may review indicative prices for shares that are displayed on the system but they will not be able to see details of individual orders. At the close of each auction, the system matches the maximum orders possible at the best price.

Between the auction phases continuous trading takes place during which members are able to see full details of the orders being placed on the market. As orders are received by the system, matches are made between the best.

One of the advantages of this system is that it allows more deals to be conducted with greater speed and reliability so the overall efficiency of the market should increase.

Because the order book is electronic, the ISE will be able to compile and publish much broader and more up-to-date information about trades and individual stocks - including the volume of trading undertaken in individual stocks. This has been unavailable to date.

Irish-German connection
The link with Germany does not give Irish listed shares an automatic listing in Frankfurt. Listing is still a matter for national authorities and is a separate process from trading. Gerardine Jones, head of listing and finance at the ISE says ‘the method of trading will be the same for the DB and ISE equities but only members of the ISE can access our market and only DB members can access theirs. Members of either can join the other very easily, given the EU passporting law. Our existing method of trading will, of course change towards automated execution but will still be possible to match deals outside the system (but they will be reported into it).’

Implications for investors
The ISE Xetra system does not give private investors direct access to trade shares themselves - transactions still have to go through a member firm. This system does open the potential for stockbroking firms to introduce on-line trading facilities for their clients, giving them indirect access to the market. The ISE expects that a number of member firms of the ISE will introduce this facility in the coming months.

Market making
The ISE anticipates that that some firms will become designated sponsors (like market-makers), committing to maintaining two-way prices in the stocks they register for. There is no indication that any increased level of market making occurs because of the introduction of electronic trading.

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