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Accessing Switzerland: Exchange takes the electronic route

The Swiss Stock Exchange has established a reputation for private asset management, accounting for 40% of the world's cross-border trade, but it faces a challenge in adapting to the growing demands of institutional investors. Now known as the Swiss Exchange, comprising the electronic linkage of the three major exchanges in Zurich, Geneva and Basel, it is moving to meet institutional demand in the context of greatly increased exchange competition.

Electronic trading of all securities began last August. With the smaller Swiss exchanges ceasing trading in 1991, the three major exchanges joined with futures exchange Soffex in 1992. The three exchanges merged at management level the following year.

Commenting on the technological changes, a stock market spokesman says: We feel we have to exploit the advantages of an electronic system and that could also mean we could move into co-operation with other exchanges. The new competition will be of a very high order. It is not only a question of technology but a question of membership structures and decision structures. One thing that can be said for sure is that to do nothing would be a great mistake."

The electronic nature of the exchange has resulted in some fundamental differences between it and open-outcry systems. In contrast to ring trading rules, the system maintains an order book in which all bid and ask prices are entered continuously.

Trading consists of pre-opening when orders can be entered or deleted with a theoretical opening price re-adjusted as a result, but with no actual trades taking place. In the opening phase the system closes the order book and starts the opening procedures. It establishes the opening price and determines the orders to be executed according to the matching rules.

After opening, regular trading begins. New orders are continually matched to existing ones in the order book. If an order cannot be carried out, it is entered in the order book.

The stock market spokesman explains: "I would say what has been seen during the last years is the re-emergence of an order-driven system. In the long term it brings those investors closer to the market. The influence of intermediaries for liquid stocks will diminish."

In terms of transparency, there is an obligation to report all transactions in listed securities traded on the exchange system. For transactions effected via the exchange system reporting is automatic. All other business including off-exchange trades must be reported within 30 minutes.

Information is published through Swiss Market Feed (SMF) including continuous paid prices, best bid and ask prices with accumulated quantity and accumulated daily volumes. The exchange is largely self-regulating, although the spokesman added that recent changes to the legal framework have meant that the Swiss exchange, traditionally operated under a very liberal regime, has recently implemented laws on transparency and investor protection. Other historically more restricted markets have been liberalising, so the effect has been an equalisation of regulation between Switzerland and the rest.

The exchange is one of the most internationally oriented, with more or less every significant international player having membership. Deutsche Bank is one of the most recent additions.

Intersettle, the Swiss clearing banks' international settlement organisation, started operation in 1994. It handles international settlement for over 50% of Swiss banks but expects much of its future growth to come from international clients.

Charles Eduard Hanslin, head of marketing and network management and a member of Intersettle's senior management, explains why it was set up: "The Swiss banks discovered a few years ago that they could bring down their costs and streamline their cross-border securities transaction business by streamlining their cross-border procedures." In effect, it allows the smaller Swiss banks, which had been using as many as 70 custodians for global custody, to outsource the activity to one company. The system uses a real time EDP meeting the demand for increased transparency and shorter settlement periods between time zones.

Hanslin continues: "We are a cross-border settlement organisation with roughly 130 active clients and 86,000 transactions monthly with Sfr140bn ($95bn) assets."

Hanslin believes that competition resides on the whole between providers of global custody procedures in the respective countries or between the banks looking for investors. But he does accept that Intersettle has advantages over other settlement providers because its staff have strong equity expertise and because it has modern modular technology that can easily be updated."

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