The demands on an efficient market place for securities trading are constantly rising. In January 1998, the Copenhagen Stock Exchange therefore formed the NOREX Alliance with the OM Stockholm Exchange. The vision of the alliance is to create a common Nordic securities market with a joint trading system and harmonised trading rules.
At end-March 2000, the alliance comprises the Copenhagen Stock Exchange and the OM Stockholm Exchange. Since June 1999, trading in equities listed on the two exchanges have taken place in the joint trading system, SAXESS.
The exchanges in Oslo and Reykjavik have signed a Letter of Intent to become members of the alliance and it is expected that the Oslo Stock Exchange will start trading on SAXESS in the spring of 2001. At present (April 2000) discussions are taking place concerning possible membership of the alliance with the stock exchange of the three Baltic States.
The Nordic securities markets have different trading rules and practices. The ambition of the NOREX Alliance is to harmonise these rules and practices etc. in order to make access to the markets easier for issuers, traders and investors.
The Copenhagen Stock Exchange and the OM Stockholm Exchange have already introduced harmonised rules governing equities trading. And the members of the alliance (including Oslo) are working on a further harmonisation.
The SAXESS system was developed by OM-Technology, which is owned by the OM Group AB (which also owns the OM Stockholm Exchange and the OM Fixed Income Exchange). The SAXESS system is located in Stockholm and all information is distributed from here via a network. All members of the Copenhagen Stock Exchange, whether they have offices in or outside Denmark, have their own terminals, which are connected to the Stockholm-based SAXESS system via this network. Danish non-members who are obliged to report are also connected to the system.
The overall advantages of the SAXESS system are: More flexibility in respect of functionality, transparency and market information; Common development for more exchanges; Easy access to more market places via cross membership.
The SAXESS system has a hierarchical structure divided into stock exchanges, markets, sub-markets and order books.
At present two exchanges are using SAXESS, viz. the Copenhagen Stock Exchange and the OM Stockholm Exchange. Each exchange is divided into markets:
The Copenhagen Stock Exchange is divided into two markets: The bond market; The equities market.
The Danish bond market is divided into four sub-markets: The ordinary sub-market; The electro broker sub-market - which is expected to be divided into a number of sub-markets - The issue sub-market and the interest market.
Bonds and interest rate derivatives are traded on this sub-market. The ordinary sub-market handles all ordinary electronic trading in all bonds and interest rate derivatives. Transaction reports relating to these instruments are also submitted to the ordinary sub-market. All exchange members may conclude transactions on the ordinary sub-market. All exchange members receive detailed pre-trade information, just like the information from the accept system in ELECTRA.
A sub-market for the professional market segment. Only registered market makers have access to pre-trade information and trading. The electro broker sub-market is expected to be divided into more sub-markets. The order books are accessible to the registered market makers.
On the electro broker sub-market the trading functionality acceptmatch is used with an attached All or Nothing condition, which is compulsory. The minimum order size is nom. DKK 25 million.
A new sub-market, which does not exist in ELECTRA. The issue sub-market handles first offerings and buy-back auctions involving government securities.
The Danish central bank, Danmarks Nationalbank, initiates all offerings and invites members to enter buy and sell orders. Continuous trading does not take place. All exchange members can enter bids. Only round lots may be entered.
The issuer, i.e. Danmarks Nationalbank, has exclusive access to pre-trade information, however, not the member IDs. Consequently, other market practitioners only have access to information about their own orders. Trades are allotted proportionately immediately after the close of the offering period. The procedure corresponds to that applicable to the opening procedure at the equity market.
The interest sub-market is only used to signal buy or sell interest and it corresponds to the interest system in ELECTRA. No trading and reporting take place at this sub-market. All exchange members can enter buy or sell interest in a security. It is possible to key in a message instead of or together with an indication of the interest to buy/sell a certain volume or at a certain price. All member firms have access to information from the interest sub-market. Since no trading takes place, no post-trade information is disseminated.
In SAXESS the securities are not directly connected with market facilities, but registered on sub-markets with different set-ups. The interest sub-market and electro broker sub-market in SAXESS reflect the corresponding facilities in ELECTRA.
An accept functionality corresponding to the accept system in ELECTRA is used on the ordinary sub-market, however, a facility like the match system in ELECTRA will not be available in SAXESS.
SAXESS introduced a number of new concepts, which already now are central to the Danish equity market. The above sub-market structure is one of the most important new concepts. Other examples are order book, order class and last price paid. The three concepts are connected. This principle means that the more a member wishes to buy/sell, the more of the total turnover he is allotted. If the market wants to buy more bonds than those issued by Danmarks Nationalbank, the market's wishes will not be met. If the issue is nom. DKK 10 billion and the market applies for DKK 20 billion then the allotment will be reduced by DKK 10 billion. If member A has placed an order for DKK 10 billion, member B for DKK 6 billion and member C for DKK 4 billion, the bonds will be allotted as follows: A gets DKK 5 billion, B gets DKK 3 billion and C gets DKK 2 billion.
The order book is identified as: Sub-market; ISIN; Trading currency. Orders are placed in the order book. A sub-market typically comprises several order books. A sub-market has one order book per bond ISIN.
The buy and sell orders may be ranked according to order class, price and time of entry, so that e.g. the best bid is placed opposite to the best ask price. This order of priority may be departed from in connection with acceptances, since the investor himself identifies the order he wishes to accept. A trade is effected when an order in SAXESS is accepted. Thus you may buy securities by entering a buy order and waiting for somebody to accept it or you may accept a sell order. The member who has entered the acceptance order decides whether it must be accepted only in its entirety or in part.
SAXESS contains two order classes, which are defined according to the size of the order: Round lot orders; Odd lot orders.
A round lot order is defined as the smallest volume of a security that can create a new paid price in a market and help create the spread in the order book (the spread is the difference between the best bid price and ask price in the order book).
The value of a round lot order for benchmark bonds equals nom. DKK 1,000,000 and for liquid and other bonds it has been fixed at nom. DKK 100,000.
An odd lot order is any block of securities that is smaller than the standard round lot size for that type of security.
The last price paid for a given bond is updated on the basis of system-generated trades concluded on the ordinary sub-market, where the trade is equal to or larger than one round lot.
Reported standard trades and standard trades based on average prices also update the last price paid, where the trade is equal to or larger than one round lot and is in fact the most recent trade. Transaction reports can only be submitted to the ordinary sub-market.
A flag on the trading information/ticker indicates whether the transaction will update the last price paid. Transactions made on other sub-markets, e.g. the electro broker sub-market, can never update the last price paid.
All system-generated transactions equal to or larger than one round lot and transaction reports equal to or larger than one round lot of the type standard trades and standard trades based on average prices are included in the SAXESS calculation of the turnover-weighted average price for the ISIN in question.
This also applies to the current update of the average price in SAXESS and to the average prices calculated by the Exchange at 15:30 and 17:00.
A flag indicates whether a transaction is included in the calculation of the SAXESS average price. The total turnover of a bond is calculated on the basis of the turnover it has reached on the sub-markets on which it is registered.
Transactions from the issue sub-market and the electro broker sub-market are also concluded in the calculation of the average price as well as the turnover of a given instrument.
Reported non-standard transactions and off-hour transactions are only included in the Exchange's total turnover and not in the SAXESS turnover.
