Matching Rules for the quote-driven part of the Exchange System

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1 Matching Rules for the quote-driven part of the Exchange System Learning Goals The goal of this Module, Matching Rules for the quote-driven part of the Exchange System, is to provide you with a basic understanding of: The various Matching Rules associated with: the pre-opening the opening continuous trading post trading What is meant by the term price/time priority

2 Table of Contents Table of Contents Matching Rules...1 Introduction...1 Purpose and scope of applicability...1 Overview of the Matching Rules of the SWX Swiss Exchange...1 The various matching procedures...1 Terminology...2 Matching Rules for the pre-opening...2 Basics...2 Matching of orders/quotes...2 Establishing the theoretical opening price...2 Matching Rules for the Opening...4 Basics...4 Establishing the opening price...4 Matching Rules for continuous trading...4 Basics...4 Matching scenarios during continuous trading...6 Incoming limit order against limit order...6 Incoming quote against limit orders...6 Matching an incoming order...7 Order of trading activities...7 Matching Rules for after-hour trading...7 After-hour trading (post-trading)...7 Matching Scenarios...8 Matching scenarios in the pre-opening...8 Matching scenarios during continuous trading...10 September 2006 SWX Swiss Exchange Page ii

3 Matching Rules Matching Rules Introduction Purpose and scope of applicability This document contains the Matching Rules of the SWX Swiss Exchange in relation to the functional specification of the quote-driven part of the exchange system. Overview of the Matching Rules of the SWX Swiss Exchange The various matching procedures The SWX Swiss Exchange observes four different matching procedures: 1. Pre-Opening theoretical matching of orders on the book to arrive at a theoretical opening price. Orders on the book are theoretically paired-off (i.e. no actual transactions take place), in order to establish the theoretical opening price (i.e. the price that would result if the opening were to take place at that moment). Based on the computation of the theoretical opening price, the order book can move into one of the three follow-up phases: 2. Opening matching of orders on the book to execute trades at the opening price. The orders on the book are paired-off in a manner such that the related executions take place at the last theoretical opening price that was computed as the result of theoretical matching during preopening; this will then become the opening price. During matching, the order book is updated. 3. Continuous Trading matching an incoming order with orders already on the book to trigger executions. The incoming order is paired-off for execution against other orders on the book. The last-paid price is re-calculated with each transaction that takes place. Therefore, a single incoming order can potentially lead to a series of executions, each at a different price. During matching, the order book is updated. 4. After-hour trading (post-trading) Post-trading runs from 17:00/17:15 to 22:00. During this time span Market Maker can continue to enter their quotes. The order entry however is not allowed only order deletion is possible. September 2006 SWX Swiss Exchange Page 1

4 Matching Rules Terminology Price-time priority Matching according to order size Prior to matching, orders on both sides of the book are arranged according to price and time of entry, regardless of which matching procedure applies: Ranking from best price to worst price (price priority) Buy limit orders (limits ranging from the best to worst price). Sell limit orders (limits from worst to best price). Within the parameters of price priority, orders are arranged according to time of entry, starting with the oldest (time priority). For limit orders, those which have been on the book longest will be executed first. The smaller of two paired-off orders will be executed in its entirety. The larger order will be reduced by the amount that was able to be executed against an order on the other side of the book. Matching Rules for the pre-opening Basics Matching of orders/quotes This process is merely intended as a means of establishing a theoretical opening price; no transactions actually take place. The round-lot orders are determinant for the theoretical opening price The round-lot orders/quotes on one side of the book are matched (according to price-time priority) with round-lot orders on the other side (also on the basis of price-time priority). This is only possible if the bid price (of the given buy order) is greater than or equal to the ask price (of the given sell order). Matching is continued until one of the two following situations arises: there are no further round-lot orders on one side of the book. no further orders can be matched (the bid price is lower than the asked price). Establishing the theoretical opening price The theoretical opening price is established on the basis of the two orders that were the last to be paired-off. The following table shows the possible combinations of the last pair of matched orders, the resultant theoretical opening price and a reference to the tree diagram in which the specific case is illustrated in more detail. September 2006 SWX Swiss Exchange Page 2

5 Matching Rules Orders/Quotes round lot limit (buy) round-lot limit (sell) Best of the following prices: 1. arithmetic mean of buy and sell limits, rounded to the next tick 2. best remaining buy limit (> mid-price) 3. best remaining sell limit (< mid-price) (see Limit orders against limit orders ) Table: Determining the theoretical opening price The following tree diagram should be examined left-to-right on the left are the two last-matched orders; in the middle is the case-by-case status of the order book; and on the right are the theoretical opening prices that apply under the given circumstances. Two round-lot limit orders are the last two tickets to be paired-off. If there is an order with a better limit than the arithmetic mean of these two orders, then this limit will determine the price. Otherwise, the arithmetic mean of the two paired-off orders rounded to the next tick establishes the opening price. If the arithmetic mean lies exactly between two ticks, the opening price will be set at the higher of the two. September 2006 SWX Swiss Exchange Page 3

6 Matching Rules Matching Rules for the Opening Basics The execution price for all trades concluded during the Opening phase will equate to the last theoretical opening price established during the pre-opening. The order book will only be opened if such is possible as the result of the pre-opening. The official opening price can only be established at the first opening of the day. If trades have been concluded in the first opening procedure of the day, then the official opening price will be last theoretical opening price determined during the pre-opening; otherwise, there will be no official opening price on that given day (the value shown on the screen for the official opening price remains EMPTY). Establishing the opening price The opening price is the last theoretical opening price that was calculated during the pre-opening. Matching Rules for continuous trading Basics Each incoming order/quote can result in a number of trades, each of which can potentially have a different trade price. A new trade price can only be determined by an order/quote (incoming or existing) that matches against another order/quote. A new trade price must be better than or equal to the limit of the best order remaining in the book (for the incoming order/quote). Each order or quote entered into the system is, if at all possible, executed against orders or quotes that are already on the book. Orders/quotes are taken from the other side of the book (in pricetime sequence) and matched against the incoming order/quote. This is only possible while the bid price (of the buy order/quote being considered) is greater than or equal to the ask price (of the sell order/quote being considered). If a quote or single quote goes into a book with one or several existing orders that will be matched against the quote, the Matching Rules are adapted such that the quote or single quote determines the execution price (quote domination). New prices must not be less advantageous than the limits that remain on the book. Application of the Matching Rules depends on the incoming order's type. September 2006 SWX Swiss Exchange Page 4

7 Matching Rules Normal orders and quotes are paired off until: all orders or quotes have been matched in their entirety and no further orders or quotes can be matched. Any remaining unfilled quantities are placed on the book. Accept orders are paired off until: all orders have been matched in their entirety or no urther orders or quotes can be matched. Any remaining unfilled quantities are NOT placed on the book. In the case of fill-or-kill orders, precisely matching orders or quotes must be found on the other side of the book for any transactions to take place. A trade is concluded if the fill-or-kill order can be executed in its entirety ("filled"). If the fill-or-kill order cannot be executed completely, it is cancelled ("killed"), i.e. NO trade takes place and the order is NOT placed on the book. Normal accept and fill-or-kill orders can be entered as round-lot tickets. Orders Existing Limit Existing Quote Incoming limit Incoming quote Existing limit price defines the price The best price of: 1. Best remain buy price defines the price (> incoming sell quote) 2. Best remaining sell price defines the price (< incoming buy quote) 3. Incoming quote price defines the price (no orders remain in the book) Quote domination! The best price of: 1. Best remaining buy price defines the price (> incoming sell limit price) 2. Best remaining sell price defines the price (< incoming buy limit price) 3. The quote defines the price (no orders remain in the book) Quote domination! Existing limit price defines the price The following decision-trees are read from left to right; the orders matched are shown on the left, the condition of the book (where applicable) is shown in the centre, and the applicable trade price is shown on the right. September 2006 SWX Swiss Exchange Page 5

8 Matching Rules Matching scenarios during continuous trading This Appendix contains examples for each of the cases described in the tree diagrams presented in the section entitled "Matching Rules for Continuous Trading". For each case, a number of scenarios would have been possible. Incoming limit order against limit order The incoming order is a limit order. It matches against the best limit in the book (bid price >= ask price) for the incoming limit order. The best limit in the book determines the price. Matched Orders Possible Conditions Price Limit order against limit order Buy limit in book > = incoming sell limit Sell limit in book < = incoming buy limit Best buy limit Scenario 5 Best sell limit Scenario 6 Incoming quote against limit orders Quote domination; if limit orders that are better than the quote limit remain on the order side, the best order limit determines the price. If no better order limit remains, the quote limit determines the price. An incoming quote matches against one or several of the best limit orders in the book. Matched Orders/Quotes Possible Conditions Price Limit orders which are better than the incoming quote remain on the order side of the book Buy limit book > = incoming sell quote Best remaining buy limit Scenario 7 Scenario 8 Scenario 9 Quote against limit order Sell limit book < = incoming buy quote Best remaining sell limit Scenario 10 No orders which are better than the quote remain in the book Quote Price Scenario 11 September 2006 SWX Swiss Exchange Page 6

9 Matching Rules The following overview explains the structure of the scenarios and the abbreviations. Matching an incoming order Round-lot orders on the other side of the book are matched (according to price-time priority) with the incoming order. This is only possible as long as the bid price of a given buy order is greater than or equal to the asked price of the related sell order. Order of trading activities Matching Rules for after-hour trading 09.15/09.30h CET Start of Opening 17.00/17.15h CET Closing After-hour trading (post-trading) During the post-trading no matching takes place. The order entry is not allowed only order deletion is possible. The market makers can continue to enter their quotes and trading in their products can occur off order book. September 2006 SWX Swiss Exchange Page 7

10 Matching Scenarios Matching Scenarios Matching scenarios in the pre-opening This Appendix contains examples for each of the cases described in the tree diagrams presented in the section Matching Rules for the preopening determining the opening price. For each case, a number of scenarios would have been possible. The following scenarios illustrate how the theoretical opening price is established. Scenario 1 shows an example for the case in which, during the matching process of the pre-opening, no orders can be paired-off against each other. The other scenarios show the status of the order book after matching of all orders on the book has been completed with the exception of the last two orders that can be paired-off against each other. The theoretical opening price is derived from the matching of the last two executable orders on both sides of the book, the reference price and the remaining orders on the book. In the following tables, the bolded order is the incoming order and the circled price is the trade price and hence the new reference price. Scenario 1 Scenario 1 PREOP, No orders matching Reference Price = 50 Bid Size T Bid Ask T Ask Size Results: TOP = Null Book goes into opening September 2006 SWX Swiss Exchange Page 8

11 Matching Scenarios Scenario 2 Limit order against limit order. On the book, there are no limited orders with a better price than the arithmetic mean of the limits of the two most recently matched orders. Scenario 2 PREOP, No limit order left in book better than arithmetic mean of the last two limit orders matched. Price Step = 1 Arithmetic Mean = 39.5 rounded to Results: TOP = 40 Book to open with 40 Scenario 3 Limit order against limit order On the book, there is one limited buy order with a better price than the arithmetic mean of the limits of the two most recently matched orders. Scenario 3 PREOP, Buy limit order left in book better than arithmetic mean of the last two limit order matched. Price Step = 0.25 Arithmetic Mean = Results: TOP = Book to open at September 2006 SWX Swiss Exchange Page 9

12 Matching Scenarios Scenario 4 Limit order against limit order On the book, there is one limited sell order with a better price than the arithmetic mean of the limits of the two most recently matched orders. Scenario 4 PREOP, Sell limit order left in book better than arithmetic mean of the last two limit order matched. Price Step = 0.25 Arithmetic Mean = Results: TOP = Book to open at Matching scenarios during continuous trading Scenario 5 Incoming limit order against limit order Scenario 5 TRD, Buy limit order better than or equal to the incoming sell limit order price (for the incoming limit order) Results: REF = 40 Trade with 40 September 2006 SWX Swiss Exchange Page 10

13 Matching Scenarios Scenario 6 Incoming limit order against limit order Scenario 6 TRD, Sell limit order better than or equal to the incoming buy limit order price (for the incoming limit order) Results: REF = 39 Trade with 39 Scenario 7 Incoming quote against limit order (quote domination) Scenario 7 TRD, Quote domination Buy limit order better than the incoming quote price Results: REF = 46 Trade with volume because remaining best buy order 46 September 2006 SWX Swiss Exchange Page 11

14 Matching Scenarios Scenario 8 Incoming quote against limit order (quote domination) Scenario 8 TRD, Quote domination Buy limit order better than the incoming quote price Results: REF = 45 Trade with because remaining best buy 45 Scenario 9 Incoming quote against limit order (quote domination) Scenario 9 TRD, Quote domination Buy limit order better than the incoming quote price Results: REF = 44 Trade with volume because of quote domination September 2006 SWX Swiss Exchange Page 12

15 Matching Scenarios Scenario 10 Incoming quote against limit order (quote domination) Scenario 9 TRD, Quote domination Buy limit order better than the incoming quote price Results: REF = 44 Trade with volume because of quote domination Scenario 11 Incoming quote against limit order (quote domination) Scenario 11 TRD, Quote domination No orders which are better than the quote remain in the book Results: REF = 50 Trade with because of quote domination September 2006 SWX Swiss Exchange Page 13

16 Matching Scenarios. None of the information contained herein constitutes an offer to purchase or sell a financial instrument traded on the SWX Swiss Exchange. The SWX Swiss Exchange assumes no liability for the accuracy or completeness of said information nor for any damage arising from actions taken on the basis of information contained in this or any other of its publications. The SWX Swiss Exchange expressly reserves the right at all times to alter the prices or product composition. SWX, SWX Swiss Exchange, SWX Quotematch, SPI, Swiss Performance Index (SPI), SMI, Swiss Market Index (SMI), SMIM, SMI MID (SMIM), SPI EXTRA, SMI Expanded, SXI, SXI LIFE SCIENCES, SXI Bio+ Medtech, SBI, SBI Swiss Bond Index, VSMI and SWX Immobilienfonds Index are registered trademarks of the SWX Swiss Exchange, and their usage is subject to licence. SWX Swiss Exchange, September September 2006 SWX Swiss Exchange Page 14