Survey on Round Lots

Survey on Round Lots 2005-09-12

Table of contents 1 INTRODUCTION... 3 1.1 Feedback and response to this paper... 3 2 Change of the Round Lot Sizes... 5 2.1 Current NOREX Environment... 5 2.2 Lot sizes in benchmark exchanges... 7 2.3 Research on round lots... 7 2.4 Implications of change in the round lot size... 7 2.5 Three options... 8 2.5.1 Option A: Harmonized round lots... 9 2.5.2 Option B: Introduction of lot size one... 9 2.5.3 Option C: Leaving the present round lot regime unchanged... 10 3 Questionnaire:...11 2(11)

1 INTRODUCTION NOREX 1 will continue with the harmonization processes during the coming years. Given the substantial growth of cross border trading in recent years one of the key targets of NOREX is also to align its rules and trading systems to the European best practices. In the process of developing the Nordic markets we are anxious to listen to the opinions and views of our trading members, issuers as well as investors. We would like to advance a constructive dialogue with our stakeholders and to maintain strong and vibrant capital markets in the Nordic area. At this stage NOREX would like to invite its members, issuers and end investors to discuss and express their opinion about round lot sizes. Currently odd lot trading and round lot trading in NOREX markets have separate trading rules. It may create a problem if the number of shares in a big order that is defined as euro or krona amount is not divisible by the round lot size. If the remaining part is smaller than a round lot it has to be partly executed in the odd lot order book. Traders and retail investors may find that the functionality i.e. the algorithm that is used in matching odd-lot orders today is quite complicated. Some market participants have suggested the reduction of the round lot limits or introduction of round lot one. The purpose of this consultation paper is to ask the opinion of our stakeholders regarding the optimal round lot regime. 1.1 Feedback and response to this paper To be able to compile all answers in an efficient way we would appreciate if you use the questionnaire at the end of this document. Please note that we are interested in receiving the company's collective view rather than a specific person s view. The answers will be treated as anonymous meaning that no participant names will be published. The results will only be presented in aggregate form. We will also weight the answers in different tiers. Our aim is to be able to present the result of the survey at the end of October 2005. This survey will serve as guidance for NOREX and be an important part of the decisionmaking although NOREX will make the final decision. The NOREX Business Development Group is responsible for this project and the content of the survey. 1 NOREX consists of the exchanges in Copenhagen, Helsinki, Oslo, Reykjavík, Stockholm, Tallinn, Riga and Vilnius. The topics covered in this paper do not affect the Baltic exchanges since they have not amended NOREX Member Rules yet. 3(11)

We would appreciate if you could send your answer by September 29, 2005 at the latest. If you have any questions or want to set up a meeting to discuss these topics with the exchange please do not hesitate to contact your account manager or any of the following persons in NOREX exchanges: OMX Exchanges Helsinki Stock Exchange Oslo Børs ASA Pekka Peiponen Odd Sigmund Røste Equities Market Activity Dept HELSINKI OSLO FINLAND NORWAY Tel: +358 961667290 Tel: +47 22 34 17 58 Email: pekka.peiponen@omxgroup.com Email: odd.roste@oslobors.no OMX Exchanges - Copenhagen Stock Exchange Iceland Stock Exchange Bjørn Sibbern Svana Huld Linnet Equities Listing COPENHAGEN REYKJAVIK DENMARK ICELAND Tel: +45 3377 0380 Tel: +354 525 2861 Email: bjorn.sibbern@omxgroup.com Email: svana@icex.is OMX Exchanges Stockholm Stock Exchange Claes Urban Dackberg Equities STOCKHOLM SWEDEN Tel: +46 8406 6812 Email: claes.urban.dackberg@omxgroup.com 4(11)

2 Change of the Round Lot Sizes 2.1 Current NOREX Environment Today trading in all NOREX markets is divided to round lot order book and odd lot order book. Generally all orders that are bigger than a certain limit are executed in round lot order book whereas small orders are executed in odd lot order book. There is some variation of the limit value in each NOREX exchange. The current round lot regime in each NOREX exchange is briefly described in the table below: TABLE 1: Summary of round lot sizes in NOREX exchanges Copenhagen Stock Exchange (CSE) Helsinki Stock Exchange (HSE) Stockholm Stock Exchange (SSE) Target lot value 10 000 DKK or 20 000 DKK Accepted lot sizes 1, 5, 10, 25, 50, 100, 200, 500, 1000, 1500, 2000, 5000 and 10000 1 000 EUR 1, 10, 20, 50, 100, 200, 500, 1000, 2000, 3000 and 5000 10.000 SEK 20.000 SEK 10, 25, 50, 100, 200, 400, 500, 1000, 2000, 5000, 10000 Oslo Bors (OB) 10.000 NOK 1, 2, 5, 10, 20, 50, 100, 200, 500, 1000, 2000, 5000, 10000 Iceland Stock Exchange (ICEX) 50.000 ISK or 100.000 ISK 20, 100, 200, 1000, 2000, 5000 or 10000 Copenhagen Stock Exchange Target lot value depends on whether the share is included in KFX or not. For KFX shares the target lot value is 20 000 DKK and for others 10 000 DKK. The lot sizes are revised semiannually in order to keep the lot values unchanged. The possible lot sizes are 1, 5, 10, 25, 50, 100, 200, 500, 1 000, 1 500, 2000, 5 000 and 10 000 shares. The round lot and odd lot orders are integrated in the order book. However round lot orders and odd lot orders have separate set of trading rules. Under some circumstances round lot orders can be executed against odd lot orders. Stockholm Stock Exchange In Stockholm the target lot value for A-list companies is 20 000 SEK and for O-list companies 10 000 SEK. The accepted lot sizes are 10, 25, 50, 100, 200, 400, 500, 1000, 2000, 5000 or 10 000 shares. The lot sizes are revised semiannually so that if the round 5(11)

lot value is higher than 100% or lower than 50% of the target round value, the lot size will be adjusted. The round lot and odd lot orders are integrated in the order book. However round lot orders and odd lot orders have separate set of trading rules. Under some circumstances round lot orders can be executed against odd lot orders. Helsinki Stock Exchange In Helsinki the target value for round lots is around 1 000 eur in connection with IPOs. The round lot values vary between 60 eur and 5 000 eur. Lot sizes can be 1, 10, 20, 50, 100, 200, 500, 1000, 2000, 3000 or 5000 shares. The average value of round lot at HSE is 832 (May 2005). Odd lot order book and round lot order book are separated. Odd lot orders are sorted in the trading system according to price-time priority just like round lot orders. However, order time priority has no effect on the matching of odd lot orders. The matching of odd lot orders is based on optimization where the number of shares traded in each odd lot matching occasion is maximized. Odd lot orders are matched only at the price of last round lot trade, which can update the latest paid price. All odd lot orders that have a price equal to or more generous than the latest paid price take part in the matching. Oslo Bors In Oslo the target lot value is no 10 000 NOK for all companies. Accepted lot sizes are 1, 2, 5, 10, 20, 50, 100, 200, 500, 1000, 2000, 5000 or 10000. Lot sizes for Oslo Bors are revised quarterly. The round lot and odd lot orders are integrated in the order book. However round lot orders and odd lot orders have separate set of trading rules. Under some circumstances round lot orders can be executed against odd lot orders. Iceland Stock Exchange In Iceland the target lot value is 100 000 ISK for blue chip companies and 50 000 for all other companies. Lot sizes can be 20, 100, 200, 1000, 2000, 5000 or 10000 shares. The lot sizes are revised semiannually in order to keep the lot values unchanged. The round lot and odd lot orders are integrated in the order book. However round lot orders and odd lot orders have separate set of trading rules. Under some circumstances round lot orders can be executed against odd lot orders. 6(11)

2.2 Lot sizes in benchmark exchanges The biggest exchanges in Europe have round lot 1. Euronext introduced round lot 1 simultaneously with the new Cash Market Trading System in October 2000. London Stock Exhange has always used lot size one and Deutsche Börse introduced round lot 1 in August 2002. TABLE 2. Lot sizes in benchmark exchanges Market Round lot size Comments London Stock Round lot 1 CCP Exchange - SETS Deutsche Börse - CCP XETRA Round lot 1 Euronext Round lot 1 CCP (Source: The various exchanges' homepages) 2.3 Research on round lots There has been very little (if any) research on the optimal lot size. However, Deutsche Börse has published following results of the change to round lot one in 2002. Deutsche Börse first changed the lot size to one in the MDAX market in March 2002. In August 2002 it reported following results: 2 Price spreads shrank from 0.71 percent to 0.63 percent on average. The liquidity measure rose for stocks with high, medium and low turnover. The share of uneven i.e. not divisible by 100 orders rose considerably. Deutsche Börse announced that since the effect of round lot one had been positive in the MDAX market the minimum lot size of one share would be applied to all DAX stocks as of August 2002. 2.4 Implications of change in the round lot size Since NOREX objective is to integrate the Nordic markets and to align the market structure to industry best practices a natural step would be to harmonize the current practices in the SSE, HSE, CSE, OB and ICEX. The ultimate target is, of course, to ensure best liquidity for market participants in our markets. However, there are several topics to be taken into account when considering a reduction of round lot values or introduction of round lot one. 2 Source: Deutsche Börse web site. 7(11)

Clearing and Settlement costs As shown in Table 2 the exchanges that have introduced round lot 1 have also CCP. NOREX exchanges do not have CCP. Currently the number of trades executed in the odd lot order book varies in the NOREX markets between 2,17 % and 8,35 % of the total number of trades. If odd lot order book would be abolished it is likely that the execution of a big order would result in a higher number of trades per order. For large orders this could mean higher clearing and settlement costs. Table 3: Amount of odd lot trading of total trading in 1-6, 2005. Number of odd lot trades/ Number of total trades CSE 2,17% HSE 2,67% SSE 6,02% OB 2,57% ICEX 8,35% Trading costs In SSE, CSE, OB and ICEX the trading fees are partly based on the number of trades. An increase in the number of trades per executed order would then have impact on the trading costs. However, it is very difficult to estimate how much the ratio of number of trades per executed order would change. Today, the ratio or trades/executed order varies between 1,6 and 1,76. Table 4: Average number of trades/executed order in the NOREX exchanges in 1-6, 2005 Average number of trades/executed order CSE 1,65 HSE 1,66 SSE 1,72 OB 1,76 ICEX 1,60 2.5 Three options NOREX proposes a reduction in the round lot size. NOREX suggest the market participants to choose from the following alternatives: 8(11)

2.5.1 Option A: Harmonized round lots In option A the target lot value would be as follows: CSE DKK 5 000 HSE EUR 500 SSE SEK 5 000 OB NOK 5 000 ISEX ISK 50 000 In all NOREX exchanges a semi-annual review process regarding lot sizes would be introduced. Market impact considerations Smaller round lot size would allow greater access to individual investors who are currently not able to trade in the round lot order book. Volumes could increase which could improve liquidity and reduce spreads. Usually listed companies do stock splits in order to attract small investors and to increase liquidity of their stock. There is also evidence that the frequency and volume of small trades increase following a stock spilt. We expect the market impacts of smaller round lots to be similar. If the lower round lot size would enable more small investors to purchase the stock, the result would be that the proportion of small trades would increase. This could lead to higher trading fees for big orders. 3 2.5.2 Option B: Introduction of lot size one In this alternative there would be just one order book. No separate matching rules would be needed for the odd lot order book. Market impact considerations NOREX would be in line with European benchmark on round lots. We expect spreads to be reduced as they were in Deutsche Börse. The market would be more available for small investors. However, since it is likely that the proportion of small orders would rise it is possible that big orders would be executed in several trades. This would lead to higher transaction costs. Round lot one will need sufficient customer support in order for NOREX to consider implementing it. 3 In HSE the exchange fee is based on executed order. In SSE, CSE, OB and ICEX the fee is based per trade. 9(11)

2.5.3 Option C: Leaving the present round lot regime unchanged The third option would simply mean no change in the current market structure. We would appreciate to receive your responses to this consultation paper by September 29, 2005. If you have any questions, please do not hesitate to contact your account manager. Yours sincerely NOREX 10(11)

3 Questionnaire: Company: Contact person; Contact details: Which option is most preferable (A, B, or C)? What is your opinion about Option-A: Harmonized round lots? What is your opinion about Option B: Introduction of round lot one? What is your opinion about Option C: Leaving present round lot regime unchanged? Are there any other comments or aspects you want to disclose to NOREX in this matter? Please send your answer to (preferably by e-mail): OMX Exchanges Henning Kruse Nikolaj Plads 6 DK- 1067 COPENHAGEN DENMARK Tel: +45 3377 0381 Email: henning.kruse@omxgroup.com 11(11)