The New Trading Systems on the Amsterdam Exchanges NV - The Retail Market

Prior to 1994 there were a number of hoekmen assigned to each particular stock listed on the Amsterdam Exchanges NV. Under the new trading mechanism there will be just one per stock. This sole hoekman - actually representing an enterprise with a number of employees - will have various stock classes under his charge.

In a number of ways the retail market will still resemble the previous trading system. It, too, will be a central market characterized by highly transparent price-making and strict supervision and compliance by the Exchange officials.

Central Position Hoekman and Order Book
In the retail market the hoekman and the Order Book maintained by him will take up a central position. The Order Book (also known as 'the Book') is an electronic system in which retail orders are collected and sorted according to limits per stock.

All ASE members and EOE clearing members will have access to the Book. They may enter (market or limit) orders or make use of the services of the hoekman for the execution of discretionary orders.

Sizes and prices of orders in the Book will be visible for all parties allowed to enter orders but the identities of the parties behind the orders will only be known to the hoekman.

When orders are transacted the hoekman will always act as the counterparty:

(i) 'administratively' when orders in the Book are matched;

(ii) actually when the hoekman himself is the buyer or seller against an order.

It goes without saying that the difference in involvement of the hoekman will be reflected in the courtage to be paid: in the first instance a considerably lower courtage rate will apply than in the second case.

The practice of in-house matching by members will not be permitted in this market segment.

The Limit Order Book
In the central market a distinction will be made between the most actively traded shares (about 30 stocks selected among other things on the basis of turnover figures) and the other shares, non-Government Bonds and investment funds.

The wholesale limit for the most active shares will be expressed in a number of shares per individual stock. The size of a limit will depend greatly on the market liquidity of the stock concerned.

The order book for the most actively traded stocks is called the Limit Order Book. Here, the hoekman is required to provide continuous bid and offer prices for a size at least the relevant wholesale threshold. Thus, the Limit Order Book shows bid and offer prices at all times, which makes it possible to execute orders automatically at the best price currently available in the Book.

Whenever possible, marketable orders (market orders or orders subject to a limit executable at the existing BBO) will be executed almost immediately without human intervention. In case there are several orders to which the same conditions apply they will be carried out in accordance with the FIFO (First in, First out) principle. The oldest order will therefore be executed first.

In the automatic Order Book the hoekman may intervene to improve the price formation process: to do this he may freeze the Book for a maximum of 15 seconds.

Order- and Quote-driven
Access to the Limit Order Book will be limited to members which are allowed to enter orders. The BBO per stock will be determined by its best bid price and its best offer price. The best bid price in the Limit Order Book is the highest of the purchase limits entered and the (obligatory) bid price of the hoekman, or a combination of the two. The best offer price is the lowest of the selling limits entered and the (obligatory) offer price of the hoekman, or a combination of the two. Consequently the Limit Order Book will be both order- and quote-driven.

Retail orders will also be subject to a lower limit to prevent very small orders from affecting the BBO. Entry of such (small) orders will remain possible, of course.

On a BBO screen (also available on the EOE floor) the BBOs of a number of stocks will be displayed, together with the corresponding order sizes. If the BBO has been formed by the quote of the hoekman the size it refers to will at least correspond with the wholesale threshold.

It will also be possible to gain an insight into all available marketable orders and the quote of the hoekman for each particular stock, sorted according to price and per price showing the cumulative size.

Three Ways
Orders can be executed in three ways:

(i) orders available in the Limit Order Book at the opening of the market can be executed against the equilibrium price entered by the hoekman;

(ii) limit orders entered in the Limit Order Book in the course of the day can be executed against orders coming in at that moment or may be hit or lifted by the hoekman;

(iii) an order entered during the day can be executed immediately (semi-) automatically against limit orders already present in the Limit Order Book or against the quote of the hoekman.

A different procedure will be followed for orders below the lower (marketable) limit (generally equal to 10% of the wholesale limit). Such orders will be executed against the position of the hoekman at the BBO price, or better if within the BBO small unshown limit orders are present.

The hoekman will enter an indicative quote before the market opens. This quote will not be binding even if it does represent the BBO at the opening.

Stockbroking firms (bankers and brokers) and hoekmen may also conclude transactions on the floor or by telephone. The actual execution of such orders can only be effected by entry and acceptance in the Limit Order Book.

One of the conditions which will apply is that limit orders already entered in the Limit Order Book will always take precedence; in practice the prices for these transactions will therefore be within the BBOs. Equal to the BBO-price, these transactions will only be brought about, if the BBO is formed by the quote of the hoekman.

The Public Order Book
The wholesale limit for the other shares has been set at an effective value of NLG 750,000 - and for the other bonds at NLG 1 million nominal value.

For these stocks the obligation for the hoekman to provide quotes will not apply, although he may do so. His quotes may also be for amounts below the wholesale limit.

All orders (both market and limit) for this category of stocks will be entered in the Public Order Book and will not be executed automatically. From time to time the hoekman will determine an official price at which the maximum number of orders can be executed.

In principle the information available to members connected with the system will be the same as in the case of the active stocks: pages showing the BBOs of a number of stocks and 'depth' pages giving a survey of a number of orders per stock.

Since orders will not be executed automatically the BBOs may cross each other, i.e. the highest bid price may be higher than the lowest offer price. Usually such a situation will not continue for long since the hoekman will set a price as quickly as possible.

It goes without saying that the information shown on the trading screens will also include market orders.

Here, too, the orders in the Public Order Book will have priority over transactions concluded on the floor or by telephone. Floor or telephone transactions will result in an immediate quotation and all (market and limit) orders entered in the Book and executable at that price will be carried out.

This market segment, too, will be subject to a great number of rules laid down in extensive system descriptions and regulations and concerning details of price-making and the execution of orders.

In addition different rules will apply with regard to:

(i) rights and stock dividends;
(ii) investment funds;
(iii) the issue of bonds.

For further information on the Amsterdam Exchanges NV please contact Joost Maas on +31 20.5234567.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.