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Euronext - Trading Mid And Small Caps

Date 27/02/2001

In November 2000, Euronext Amsterdam published a consultation document entitled Trading Mid & Small Caps, which looked at the way shares in medium-sized and small companies would be traded following the introduction of the Euronext trading system. Market participants were asked to respond to the document. All the responses have now been received and taken into consideration, resulting in a final document entitled Euronext - trading shares in small and medium-sized companies.

The new document contains a full description of the way in which shares in these companies will be traded at Euronext, the reasons for the selection of the new trading system, and how the new system differs from the system described in the consultation document published in November 2000. The new document marks the end of the consultation phase. The complete document is attached as an appendix to the press release on Euronext’s website (www.euronext.com /Euronext Amsterdam/News/Press Releases/Press Release 2001.018).

Below follows a description of the three main ways in which the new system differs from the system described in the consultation document.

First, the minimum number of transactions a year that have to be executed to qualify for continuous trading without a liquidity provider has been reduced from the originally proposed threshold of 20,000 transactions. In the presentations given since the consultation document was published, it was assumed that a reduction to 15,000 transactions could be considered. However, it has since been decided that 5,000 transactions a year should be used as a basis, which is equivalent to approximately 20 transactions a day. This further reduction was made possible by the introduction of a narrow margin for the dynamic reference price (last-known price) and the restriction on volatility that this measure is expected to lead to. The dynamic price margin has been set at such a strict level so that individual orders, even in less liquid securities, cannot lead to sharp price movements, as instead an auction will take place. A strict dynamic price margin allows even those securities in which there is a substantially lower number of transactions to be traded continuously. A strict dynamic price margin that actually triggers volatility interruptions will result in trading taking place in various spontaneous auctions, which take place at times that a party entering orders ‘requests’ this. Trading is therefore possible at any time of day, possibly with auctions organised with a certain frequency to stimulate fair and orderly trading. Another factor that was taken into account is that securities in which there are substantially fewer than 20,000 transactions a year are currently traded continuously in Paris and Brussels. This is considered a satisfactory system and is based entirely on a stricter static price (last-known auction price). The dynamic price margin is not used at the moment in Paris and Brussels, and it is suspected that the dynamic price margin will make it possible to introduce a significantly lower transaction threshold than originally planned.

The responses of various issues led to the decision that the threshold would not be set at the level where a liquidity provider is desirable, but at the level where it is absolutely necessary. The stricter dynamic price margin offers investors protection against extreme volatility that may be caused by their order. Euronext strongly advises issuers in whose shares there are less than 20,000 transactions a year to look into whether a liquidity provider should be active in their shares. The liquidity provider will certainly boost trading in their shares and will reduce the number of volatility interruptions. Although a strict dynamic price margin means that continuous trading is possible, it is desirable to encourage the use of liquidity providers. Without them, spontaneous auctions may take place one after the other.

Second, Euronext took account of the request for liquidity providers to be active in several securities. The original intention was not to allow liquidity providers access to securities that meet the criteria. However, in the meantime it has been decided that liquidity providers can be used for all securities, with the exception of shares in the Euronext 100. In accordance with the proposals put forward by the hoekman firms, tighter spread requirements will apply to more liquid securities, in particular those included in the Next 150 index. For these securities, the spread is a maximum of 3% and the transaction size will be related to the average daily trading volume.

Finally, Euronext has also tightened the other spread requirements that will apply to liquidity providers. Securities not included in the Next 150 index will be subject to a maximum spread of 4%. This decision was based on the dynamic price margin of 2%. If the maximum spread was 5%, the liquidity provider could calculate its quote in a way that would always trigger volatility interruptions whenever the quote was hit or lifted. This is not a desirable situation.