Structure of the Financial Market
In this chapter we illustrate the main characteristics of the Spanish market. We explain the basic rules which dominate it and the main criteria which “players” have to follow. We do
that to give transparency to the system that is at the heart of our analysis. In particular, we describe the composition and the calculation rules of the main indices, with special regard
to Ibex-35 , its components being the ones analysed in this thesis.
1.1
Spanish Financial Market
The Spanish market is an order-driven market, with liquidity providers (specialists) for cer-tain shares. The market features real time information on its screens and automatic relaying
of trading information, thus transparency is fully guaranteed.
The current organisation of the Spanish stock market is the result of the reform pursuant
to the enactment of Stock Market Law 24/1988, aimed at adapting the market traditional structure to an increasingly dynamic and competitive environment.
Prior to the reform, the stock market was characterised by being highly fragmented: trading in shares was isolated and unconnected among the four stock exchanges (the Madrid
exchange was founded in 1831, Bilbao in 1890, Barcelona in 1915 and Valencia in 1970).
The only market members authorised to trade were brokers.
CATS (Computer Assisted Trading System) was the first electronic trading platform used
in Spain to connect the four stock exchanges: it was imported from the Toronto Stock Ex-change and in operation since 1989. On 2 November 1995, this system was substituted by
the Spanish Stock Exchange Interconnection System (hereinafter SIBE), which culminated with the listing of the shares then comprising the Ibex-35 index. This is still the platform
used today.
1.1.1
The Spanish Stock Exchange Interconnection System
The current trading platform that connects the four Spanish stock exchanges (Madrid, Bar-celona, Bilbao and Valencia), ensuring a single point of liquidity per share, is called SIBE.
SIBE facilitates direct, real time communication among the stock exchanges, allowing for a single price and order book per share. This interconnection has boosted market liquidity and
depth.
SIBE is managed by “Sociedad de Bolsas”, a limited company that is owned equally
by the four Spanish Stock Markets’ Governing Bodies. These are limited companies whose shareholders are “market members” of the corresponding stock exchange (broker-dealers,
brokers and financial institutions). The main difference between these is that brokers may
only trade on behalf of third parties, whereas broker-dealers and financial institutions can trade both on behalf of third parties and on their own account.
Broker-dealers, brokers and financial institutions are subject to supervision, inspection and
monitoring by the CNMV, the Spanish Securities Commission, in all issues relating to their operations on shares market. The CNMV is a state-owned enterprise with its own legal status
whose purpose includes the regulation, supervision and inspection of the shares market and activities of all individuals and legal entities.
1.1.2
Market structure
Most shares listed on the SIBE form part of the Main Trading market, which is an order-driven continuous market with an opening auction at the session’s beginning and a closing
charge of providing liquidity for the stocks and have acquired certain commitments within the stock exchanges.
These is also a specific type of trading (trading of shares on the fixing market) whereby the listed stocks are auctioned throughout the session, with two periods for share allocation.
This facilitates efficient price formation and reduces volatility.
In addition, there are different market segments, with specific trading mechanisms
aim-ing at addressaim-ing the individual characteristics of certain stocks. This allows for diversity in a market that relies on a common electronic trading system. These segments are the Nuevo
Mercado, composed of technological stocks with strong growth potentials, and the Latibex,
comprised of Latin American stock listed in euros on the SIBE.
These is also a market for large volume transactions carried out during the market open trading session, known as the Block Market.
Lastly, there is the Special Operations Market for after-hours trading, whereby autho-rised or transmitted transactions that fulfil certain cash or price requirements are
communi-cated.
Basic types of order
There are three different basic types of order that can be entered both on the open market
and during auctions. These are listed below:
Market orders: these are orders entered without a specific price limit and which are
traded at the best opposite-side price at the time of entry. If the order is not fully executed against the first opposite-side order, it will continue to be executed at as many opposite-side prices as are necessary until it is completed. These orders can be
introduced both in auctions and on the open market. If a market order is not traded at the auction, it remains in the book as a market order. If no opposite-side price exists
for a market order this is placed on the order book awaiting a counterpart.
Market to limit orders: these are orders without a price which are limited to the best
opposite-side price on the order book. If the share is on the open market and there is
Limit orders: these are orders to be executed at their limit price or better. Buy orders
are executed at this price or at a lower price on the opposite side of the order book.
Sell orders are executed at the limit price or at a higher price on the opposite side of the order book. These orders allow:
– The wish to trade up to/from a certain price to be expressed.
– The execution of an order against existing market orders at a price no lower than
the limit price with the rest being left on the market at the limit price.
Trading Phases
The session begins with the Opening Auction, during which the order book is partially visi-ble (only the equilibrium auction price and the bid and ask volumes subject to trading at said
price, along with the number of corresponding orders at said volume, are shown). During this time, orders can be entered, altered and cancelled, but no trades can be executed. All
previous days’ orders remaining in the order book and entered during the Opening Auction participate.
This period (for Main Trading and the Nuevo Mercado) lasts for 30 minutes, with a 30 second random end period to prevent prices from being manipulated. After the random end
the allocation period begins, during which the shares included in orders subject to execution at the fixed auction price are traded. During the allocation period, orders cannot be entered,
altered or cancelled. On special occasions, the opening auction may be extended.
Once the shares are allocated, members receive information on the total or partial
exe-cution of their orders. All non-executed orders in the allocation period remain on the order book. The market is informed of the opening price, trading volume, time of each trade and
the identity of the trading members. The market then opens.
During the Open Market period, orders can be entered, altered or cancelled, with trading taking place at the price fixed according to the open market matching rules, generally in
accordance with the priority established by price and time of order entry criteria. These basic criteria and rules can be resumed below:
Price-time priority of orders criteria: orders with the best price (highest buy and
first have priority.
Best opposite side price criteria: orders entered on the system are executed at the
best opposite side price. In other words, a buy order which can be executed will be executed at the price of the first order on the sell side of the order book. Equally, a sell
order entered in the system which can be executed at that moment will be executed at the price of the first order on the buy side of the order book.
Rule 1: If a limit or market order entered in the system finds an opposite-side limit
order, the order which is in the book determines the trading price. The non-executed
part is executed at the price of the next limit or market order.
Rule 2: If a market order is entered and on the opposite side there are only market
orders, the trade will take place at the price of the last execution. If there is no last price or this is outside the static price range, the last price will be the static price.
Rule 3: If a market order is entered and on the opposite side of the book there are
market and limit orders, the trade will take place at the last price or at the best limit order price.
Rule 4: If a market to limit order is entered and on the other side of the book there are
market and limit orders, the best opposite-side price will be taken and the trade will take place with both the market and limit order at this price.
Trading hours for main trading and for the “Nuevo Mercado” are from
to
.
The order book is open and available to all market members (buying and selling member codes are shown)
While the market is open, trades are made. However, this period can temporarily be interrupted if a Volatility Auction arises (i.e.when the price range, the maximum allowed
variation in either directions around the price of the share at any given moment, is breached). The session ends with a -minute auction, Closing Auction, between
to
,
with the same characteristics as the opening auction and a -second random end period. The
price resulting from this auction will be the closing price of the session. If there is no auction
weighted average price of the last traded units. If two prices have the same difference
with respect to this weighted-average price, the price will be the last executed.
Sometimes Special Operations can take place in a period from
to
which do not influence the stocks prices.
17:30 17:35 17:40 20:00 9:00
8:30
Opening Open
Trading Hours
Auction SpecialOperations Closing
Market Auction
Figure 1.1: Scheme showing the principal Spanish market sessions. The fi rst “Opening
Auction”: orders can be entered, altered and cancelled but not matched. The main “Open Market”: trading taking place at the price fi xed according to the open market matching rules, the “Closing Auction”: orders may be entered but trades are not made.
Conditions of order execution in Open Market
Limit, market to limit and market orders are carried out only if particular market rules occur. These can be summarised in three main execution conditions:
Execute or Eliminate: this order is executed immediately for the amount possible
and the system rejects the rest of the order volume.
Minimum volume: when entered on the market, this order should execute a specified
minimum volume. If this minimum amount is not executed, the order is rejected by
the system.
Fill or Kill: this order should be fully executed when entered or be rejected before it
is traded. This is a special type of minimum volume order for which this minimum volume is equal to the total volume of the order.
Information dissemination
SIBE includes a specialised information dissemination system, designed to distribute
de-tailed information on how the market is performing, both in terms of trades actually being carried out on the market and the system’s order book, in real time. The aim is to provide a
service giving a true reflection of market transparency.
This flow of information provides all entities connected to the system with real time
information on each trade carried out on the market, any change in the Ibex indices and the status of the order book throughout the session.
The following contents are available:
Trades: a message is issued each time a trade is carried out on the SIBE. The message
details the price, volume and counterparties of the trade.
Order book: a message is issued each time there is a change in the five best buy and/or
sell positions.
Index Information: messages with information pertaining to all Ibex indices are
is-sued.
1.1.3
Ibex-35
The most important index of the Spanish Market is Ibex-35 . It is composed of the
securities quoted on the Joint Stock Exchange System of the four Spanish Stock Exchanges,
which were most liquid during the control period according to the following rules:
The control period for the securities contained in the Index is, for ordinary reviews, the
six-month interval beginning with the seventh month prior to the start of the calendar half-year period.
The liquidity factors take into account are:
– The trading volume in Euros or orders in the order-driven market.
– The quality of trading volume, the characteristics and amount of the transactions
For a stock to be included in the Ibex-35 , its average capitalisation must be greater than of the average index capitalisation during the control period.
Index calculation
The formula used in the calculation of the Index value is:
Ibex-35 Ibex-35 & ( (1.1)
where is the aggregate capitalisation of all companies included in the index (No. of
computable shares ) price of the shares), and ( the amount used to adjust the value of the
index due to capital increases.
Coefficient ( represents the capitalisation adjustment required to assure Index continuity
and is introduced in connection with certain financial transactions defined according to the
Technical Regulations for the Composition and Calculation of the index, as well as in ordi-nary and extraordiordi-nary redefinitions of the Index. The value of the( adjustment component
reflects the capitalisation difference of the Index before and after the adjustment.
1.2
Our Analysis
The database[2] we have analysed contains all transitions done in the Spanish stock market during the period june * - december * * . Each line is composed by the following
columns: date, time, agent seller code, agent buyer code, number of stocks exchanged, price for stock, name of stock. In Fig 1.2 we report a sample extracted from the database.
Before using this database we had to clean it of all that transitions taken place outside the open market phase, i.e. after 5:30 PM and before 9:00 AM. We have done it, because these
transitions are only Special Operations, which do not influence the stock prices. Another correction we applied has been to bring back the price share to its previous value after a price
split1, to remove foolish peaks which could be misinterpreted as little crashes or bubbles in
1Division of the outstanding shares of a corporation into more shares with a price divided by the same ratio.
Normally, splits must be proposed by directors and approved by shareholders. Companies split their stock to reduce its price and make it more attractive to certain kinds of investors who generally prefer to buy shares trading around the lower end of the price spectrum
Figure 1.2: High-frequency records of the Ibex-35 . The data contain information on
the market operations at each time. The code of agent seller, the code of agent buyer, the stock tick, how many stocks exchanged, at what price, and at what time.
the time series of price returns. After these preliminary corrections, the database was ready
