Focus Money ETF-Magazin 03/2016: „Protection in times of volatility", Interview with Dr Martin Reck, Managing Director, Deutsche Börse AG

12 Sep 2016

Focus Money ETF-Magazin 03/2016: „Protection in times of volatility", Interview with Dr Martin Reck, Managing Director, Deutsche Börse AG

Titel: Dr. Martin Reck, Deutsche Börse Cash Market

Directly following the Brexit referendum , we saw an extremely volatile day on the stock exchanges, with a number of slumps in ETF trading in the double-digit percentage range. How strongly do such developments challenge the exchange market infrastructure?

The day you are referring to, 24 June, was an extraordinary day for stock exchanges. Due to the high volatility, protective mechanisms in place for Xetra trading were employed at high frequency. The system was under a strain comparable to that of the financial crisis in 2008 or to 2014, when the extreme price movements on the Chinese market swept a wave of volatility cross the exchanges globally. However, our Xetra technology stands unfazed in the face of trading days with a high system load.

What kind of protective mechanisms are triggered on days such as these?

An extremely important protective mechanism in continuous trading is volatility interruption in an auction, used to decelerate trading and provide orientation to the market in hectic trading phases.

What triggers a volatility interruption ?

Each security in Xetra trading has price ranges that run parallel to the price development in continuous trading – one static and one dynamic (see chart). The static price range is based on the opening price, and it is relatively wide. The dynamic price range is narrower and based on the last price determined. Volatility interruption is triggered if the price of a security is determined outside one of these ranges. Trading then switches from continuous to auction for a minimum of two minutes.

Titel: Chart: protective mechanisms
Does this mean trading is actually suspended for a short period?

No, that is exactly what does not happen. During the auction, market participants can continue to place orders and enter quotes and change or delete them. In addition, indicative prices are also continuously displayed during auction, providing market participants with orientation on price development. These are the key benefits compared to a trading suspension, which renders market participants incapable of action and usually leads to increased market uncertainty and volatility.

What happens after a volatility interruption?

At the end of a volatility interruption, the price is determined in the auction and continuous trading can be resumed. If the determined price is still outside the previously defined range, extended volatility interruption sets in. In this case, Market Supervision handles the situation after consultation with market participants.

Are there further mechanisms to protect investors also on days with low volatility?

There are – along the entire process chain in exchange trading. When an order is entered, Xetra conducts a plausibility check to avoid errors such as the confusion of limit and volume. In addition, a variable curbing mechanism ensures that the maximum order number per second is technically limited per participant to prevent a slowing down of the overall system. In order execution, the independent Trading Surveillance Office (Handelsüberwachungsstelle, HüSt) monitors the fair price determination in accordance with the exchange rules for every investor. In post-trading, our clearing house is responsible for risk minimisation and the actual delivery and payment of securities.