The German Connection

George Macdonald, CEO of Macdonald Associates (MACD) looks into the history of German exchange platforms and reveals the future of German exchange connectivity through FIX.

Germany was slow on the uptake of FIX. In order to understand that statement, it is necessary to take a look at the past. It was not because they were slow at adopting electronic trading, but in fact, precisely the opposite; the Swiss Exchange (then called SOFFEX) and the German Exchange (then called Deutsche Termin Börse) were right at the forefront of electronic trading with their systems going live at the end of the eighties.

Electronic trading took time to gain significant momentum. In 1996 the BUND (a futures contract on German debt) was still traded almost exclusively in London at LIFFE in open outcry. The fully electronic German exchange, despite having been around for six years, had managed to gain only 30% of market share. Indeed, many people at LIFFE believed that derivative trading could never move off the floor and onto an electronic platform. The move to Frankfurt happened in stages, with intense competition at the end of 1997. However, once 50% was reached, the tipping point had occurred and the volumes migrated entirely in just a few months.

The Germans had demonstrated that electronic trading could work. The cash market for equities was also one of the first to move to a fully electronic platform, with the Deutsche Börse order books going live on Xetra in 1997. Since then, electronic trading has swept the globe, with almost no market resisting the inevitable change. There have also been a lot of other changes since then as the trading process continues to evolve. The early success was also the reason for the slow uptake of FIX; the first mover advantage on electronic trading meant that the exchanges and banks built a trading landscape tightly knitted around a small number of proprietary systems.

Ultimately, two main connections to liquidity evolved: Xetra, a proprietary trading platform developed by the Frankfurt exchange, and XONTRO, a system which connected the banks to the regional exchanges (Stuttgart, Düsseldorf, Hamburg, München, Hannover, Berlin and the Frankfurt floor). These two systems ensured that the trading landscape became intertwined and dependent on the existing infrastructure. There was no pressing need for a change. This, in turn, made it very difficult for new entrants such as Equiduct, NASDAQ Europe and Chi-X to gain a foothold. The move to FIX was something inevitable, however, and it was only a question of when, not if, the connectivity changed.

Gradually, some new exchanges did experience success. For example Tradegate, a new startup exchange based in Berlin, has recently been successful in capturing flow, using FIX as their main method of connectivity. Thorsten Commichau of Tradegate said: “FIX is basic technology that makes sure your order stream doesn’t dry up. We at Tradegate have been providing it since 2001 and recently an increasing number of other German exchanges have started to use it too. Tradegate’s FIX interface supports modern order types such as one-cancels-other and trailing-stop limit and has made proprietary access alternatives unnecessary. In 2010, Tradegate Exchange recorded 3.2 million trades, a growth of 33 percent compared with 2009. Nowadays, over 80 percent of all customers send their orders to Tradegate Exchange in the FIX format.”