How the Euronext.liffe Markets Work

Transcription

1 How the Euronext.liffe Markets Work

2 This document is an introduction to how the Euronext.liffe markets work detailing how trading takes place on LIFFE CONNECT.The vast majority of the LIFFE CONNECT functionality is common to all markets.where there are differences these are highlighted clearly. Euronext refers to Euronext N.V. and any company which is at least a 50% owned subsidiary of Euronext N.V. All proprietary rights and interest in this publication shall be vested in Euronext and all other rights including, but without limitation, patent, registered design, copyrights, trademark, service mark, connected with this publication shall also be vested in Euronext. LIFFE CONNECT is a trademark of LIFFE Administration and Management. LIFFE Administration and Management is a part of the Euronext Group. No part of this publication may be redistributed or reproduced in any form or by any means or used to make any derivative work (such as translation, transformation, or adaptation) without written permission from Euronext. Euronext shall not be liable (except to the extent required by law) for the use of the information contained herein however arising in any circumstances connected with actual trading or otherwise. Neither Euronext, nor its servants nor agents, is responsible for any errors or omissions contained in this publication.this publication is for information only and does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction.all information, descriptions, examples and calculations contained in this publication are for guidance purposes only, and should not be treated as definitive. Those wishing either to trade Euronext futures and options contracts or to offer and sell them to others should establish the regulatory position in the relevant jurisdiction before doing so. Euronext N.V. P.O. Box GD Amsterdam The Netherlands Tel +31 (0)

3 Contents 1 Introduction 1 2 Background 2 LIFFE CONNECT Euronext.liffe s state of the art trading platform 2 Euronext, LIFFE and Euronext.liffe 2 The benefits of Euronext.liffe and LIFFE CONNECT The LIFFE CONNECT Trading Host 4 Access to LIFFE CONNECT 4 What happens to a trade? 9 Market data 9 5 Trading 10 Market Services 10 Customer Escalation 10 Anonymity 10 System Configuration 10 Trade Priority/Matching 12 Examples of Algorithms 12 6 Entering and Managing Orders 15 Submitting Orders 15 Price Limits 15 Order Types 16 Order Attributes 17 Guaranteed Cross Mechanism for Brussels and Paris Markets 18 Crossing and Pre-negotiated Trading for the LIFFE market 18 Recognised Strategies on LIFFE CONNECT 19 Volatility Trades (Delta Neutral) 19 Order Management 20 Wholesale Trading 20 FLEX Options 20

4 Automated Price Injection Models 20 Termination of a Trading Session and Subsequent Re-Start 20 7 The Trading Day 21 The Responsible Person Implied Spread Trading Settlement Prices and Clearing Process 26 An Overview 26 Daily Settlements 26 Contacts Inside back cover

5 How the Euronext.liffe Markets Work 1 1 Introduction This brochure provides a description of how derivatives trading takes place on LIFFE CONNECT for the Euronext.liffe markets. This ranges from the ways in which the trading platform can be accessed, to how orders are input, matched and cleared and how the markets are controlled by the relevant Market Services departments in Brussels, London or Paris. LIFFE CONNECT functionality is generally the same for all Euronext.liffe markets. However, there is some functionality which has been tailored for individual markets, as LIFFE CONNECT continues to be enhanced to ensure that users of Euronext.liffe markets have the functionality that they require.

6 2 How the Euronext.liffe Markets Work 2 Background LIFFE CONNECT Euronext.liffe s state of the art trading platform Euronext.liffe s electronic trading platform LIFFE CONNECT - was designed and developed by LIFFE in conjunction with customers and selected Independent Software Vendors (ISVs) to replace its open outcry trading floor. The first contracts to migrate from the LIFFE trading floor to LIFFE CONNECT were Individual Equity Options on 30 November Since then, the transition of contracts from the trading floor environment to screen has taken place in phases to ensure a smooth transition, with each release of LIFFE CONNECT focusing on a specific market segment. Following the successful migration of the Exchange s commodity products to LIFFE CONNECT on 27 November 2000, LIFFE became a fully automated exchange, with its entire product range trading electronically. Euronext, LIFFE and Euronext.liffe Euronext was formed by the merger of the Amsterdam, Brussels and Paris cash and derivatives exchanges in September The Euronext Group has since grown further, adding BVLP (the Portuguese cash and derivatives exchange) and LIFFE (The London International Financial Futures and Options Exchange).The derivatives businesses of Euronext and LIFFE are being combined under the Euronext.liffe umbrella with the phased migration of Euronext derivatives markets to LIFFE CONNECT, the most sophisticated electronic derivatives trading platform in the world.the Brussels and Paris markets will migrate to LIFFE CONNECT in Spring 2003, with Amsterdam and Lisbon to follow.this document is focused on the Brussels, LIFFE and Paris markets.

7 How the Euronext.liffe Markets Work 3 3 The benefits of Euronext.liffe and LIFFE CONNECT A wider range of products to trade Through LIFFE CONNECT, Euronext.liffe customers will have access to a wider range of complementary products. Euronext.liffe brings together Euronext s traditional strength in equity derivatives, with LIFFE s expertise in short term interest rate products. Euronext.liffe offers the broadest range of products available on any exchange in the world, providing futures and options contracts across five product lines: short term interest rates, bonds, swaps, equities and commodities. Further information If you require any further information, there are two extremely comprehensive web sites which provide information about all Euronext.liffe markets, products and services. Please visit and A broader, deeper market Enhanced global distribution of LIFFE CONNECT, bringing wider access to the market and more participants, will aid price formation and liquidity.the economies of scale created by the Euronext.liffe partnership will benefit existing and future customers much faster than might otherwise have been achieved by the markets separately. Fast track membership On 28 October 2002 Euronext.liffe introduced asingle fast track membership scheme.the move gives existing members of derivatives markets in Amsterdam, Brussels, Lisbon, London and Paris the potential to trade all Euronext.liffe products by filling in a single form to obtain membership of the other markets, rather than the individual applications to each market that were previously required. Currently, approval for membership depends on an applicant satisfying the appropriate regulatory requirements. Many firms already benefit from the EU s financial services passport, and the regulators are now considering whether a proxy passport might be issued to firms who do not qualify for the existing arrangements. Ultimately, Euronext.liffe intends to create a more unified membership structure and process to reinforce the benefits of bringing all Euronext.liffe products onto a common trading platform, LIFFE CONNECT.

8 4 How the Euronext.liffe Markets Work 4 The LIFFE CONNECT Trading Host The Trading Host is at the heart of the trading system and handles the matching of bids and offers.there are, in fact, two LIFFE CONNECT Trading Hosts. Firstly, the Trading Host for Equity Options, which hosts all individual equity option contracts traded on the Brussels, LIFFE and Paris derivatives markets. Secondly, the Trading Host for Futures and Options on Futures, which hosts all other contracts traded on the Brussels, London and Paris derivatives markets. LIFFE CONNECT is acknowledged to be the world s leading electronic derivatives trading system and the only one that has proven itself capable of trading high volumes of complex short term interest rate products. In keeping with other electronic trading platforms, LIFFE CONNECT is an anonymous, order-driven system, where traders are unaware of their actual counterparty both pre and post-trade. LIFFE CONNECT is based on an open system architecture using an Application Program Interface (API) which allows users to build or purchase trading or view-only applications to suit their specific business needs. This offers the potential to integrate front/back office trading, settlement, risk management and order routing systems as well as allowing customers to trade derivatives and cash markets on the same screen. Access to LIFFE CONNECT LIFFE CONNECT can be accessed electronically from the world s major financial centres 1.Traders wishing to access LIFFE CONNECT can do so via one of the many front-end trading applications which have been developed by Independent Software Vendors (ISVs) or via an application developed by a member in-house.these applications are personalised trading screens that link the user to the market via a chosen network. Users have considerable flexibility and choice of networks including: direct access from London via Euronext.liffe s local network direct access via Euronext.liffe s international network provider access through services offered by Value Added Network (VAN) partners access via a member s own network access via a leased line to an Application Service Provider (ASP). Please note that to access LIFFE CONNECT members will require a2mbs line and 2 gateways. LIFFE CONNECT provides the world s most advanced and complete electronic trading environment, offering unrivalled flexibility to the customer. 1 Regulatory restrictions may prevent or condition access in some jurisdictions.

9 How the Euronext.liffe Markets Work 5 Direct Access to LIFFE CONNECT (London) Typical system configuration for UK/London based access via Euronext.liffe s Exchange Access System (EASy) network: Site Two Trading Host (Equity and Financial) Euronext.liffe in London Site One Trading Host (Equity and Financial) Router/s Router/s Euronext.liffe EASy WAN 2 Mgb line 2 Mgb line Equity Gateway Financial Gateway Router/s Network Address Translator MEMBER SITE IN LONDON API Trading Application API Trading Application Member WAN API Trading Application MEMBER BRANCH OFFICE API Trading Application

10 6 How the Euronext.liffe Markets Work Direct Access to LIFFE CONNECT (International) Typical system configuration for access via Euronext.liffe s international network: Site Two Trading Host (Equity and Financial) Euronext.liffe in London Site One Trading Host (Equity and Financial) Router/s Router/s Euronext.liffe Global WAN POINTS OF PRESENCE IN MAJOR FINANCIAL CENTRES Router/s Router/s 2 Mgb line 2 Mgb line Equity Gateway Financial Gateway Router/s Network Address Translator MEMBER SITE API Trading Application API Trading Application Member WAN API Trading Application MEMBER BRANCH OFFICE API Trading Application

11 How the Euronext.liffe Markets Work 7 Value Added Network (VAN) Access to LIFFE CONNECT Typical system configuration for access via a access through services offered by VAN partners: Site Two Trading Host (Equity and Financial) Euronext.liffe in London Site One Trading Host (Equity and Financial) Router/s Router/s Euronext.liffe EASy Network Gateway/s Router/s Network Address Translator VAN's DATA CENTRE API Trading Application API Trading Application VAN's Wide Area Network 2 Mgb line 2 Mgb line MEMBER SITE VAN's Trading Application MEMBER SITE VAN's Trading Application MEMBER SITE VAN's Trading Application

12 8 How the Euronext.liffe Markets Work Application Service Provider (ASP) Access to LIFFE CONNECT Typical system configuration for access via a access through services offered by ASPs: Site Two Trading Host (Equity and Financial) Euronext.liffe in London Site One Trading Host (Equity and Financial) Router/s Router/s Euronext.liffe EASy Network Gateway/s Router/s Network Address Translator ASP DATA CENTRE API Trading Application API Trading Application ASP agreed communication method (leased line, managed network, internet...) 2 Mgb line 2 Mgb line MEMBER SITE Graphical User Interface MEMBER SITE Graphical User Interface MEMBER SITE Graphical User Interface Traders may also access the market via: Order routing services offered by a member.these services allow a trader/client to enter his orders electronically to a member who in turn inputs the order immediately onto LIFFE CONNECT. Trading bureaux and arcades, which allow independent traders to trade directly on LIFFE CONNECT under the control of a member.

13 How the Euronext.liffe Markets Work 9 What happens to a trade? Trading on LIFFE CONNECT takes place by submitting an order, via a trading application (front-end software), into the LIFFE CONNECT central order book. Having received the orders, the LIFFE CONNECT Trading Host stores all orders in a central order book and performs order matching with corresponding orders (this is an electronic representation of the market place) where the criteria for determining trade priority (the sequence in which orders are filled) is dependent on the individual specification of the contract being traded. A trader has the ability to revise orders and orders may be withdrawn at any time, either individually or as a block. After a trade has been executed on LIFFE CONNECT confirmation of execution is sent to the trading application.trade details are also sent from the Trading Host to Clearing21 for Brussels and Paris derivatives markets and the Trade Registration System (TRS) for the LIFFE market in real-time throughout the day. Clearing21 and TRS allow complete post-trade processing by member back offices. Clearing21 and TRS provide various facilities, including the allocation and registration of trades originating on LIFFE CONNECT. In the case of the LIFFE market, trades are passed through to the Clearing Processing System (CPS). CPS extends the functions of TRS by providing position maintenance and clearing functions, enabling customers to co-ordinate their trading, settlement, margining and risk management within one system.these processes are available on Clearing21 for the Brussels and Paris derivatives markets. In the case of the LIFFE market, once a trade is registered, the London Clearing House (LCH) becomes the central counterparty to the buying and selling Clearing Members. As central counterparty, LCH ensures the financial performance of registered trades through to delivery.an automatic feed between CPS and LCH transmits all details of instructions submitted to CPS by members. In the case of the Brussels and Paris derivatives markets the central counterparty function is carried out by Clearnet, who ensure the financial performance of registered trades through to delivery. Market data LIFFE CONNECT distributes data in real-time via the Market Feed (for onward dissemination via a network of Quote Vendors (QVs)) and the LIFFE CONNECT API.The API is the software that allows a front-end trading application to communicate with the LIFFE CONNECT Trading Host. Market data gives customers the ability to track and view all price and aggregate volumes available for buy and sell orders of a specified contract, series, or explicit strategy market.

14 10 How the Euronext.liffe Markets Work 5 Trading Market Services Market Services in Brussels, London and Paris ensure that a fair and orderly market is maintained at all times. Market Services are the trader s daily points of contact with the Euronext.liffe markets and each location has teams of specialist staff dealing with specific product areas. To assist Market Services staff, a number of sophisticated systems have been developed which monitor the market continuously throughout the trading day.these systems alert staff to any market activity that may require investigation and/or remedial action by the Euronext.liffe markets. Customer Escalation Euronext.liffe takes the views of all users of the markets very seriously and has a customer escalation procedure in place to ensure that any issues that may arise are dealt with in an appropriate manner. Contact details for Market Services can be found on our web site. System Configuration Irrespective of whether a trader chooses to develop their own bespoke trading application or use a solution provided by an ISV, the method by which the trading application communicates with the LIFFE CONNECT system is through software provided by Euronext.liffe.This is described in detail in the API Reference Manual, copies of which may be downloaded from or can be obtained by contacting Euronext.liffe Technical Conformance Services on +44 (0) or by ing [email protected]. The API can reside on the trading application workstation (known as a multiple API implementation) or on a server-based application (known as a single API implementation). Anonymity Trading anonymity is a key aspect of the LIFFE CONNECT market.traders in the market will not be aware of whose orders they are viewing or trading against, either before or after a trade.

15 How the Euronext.liffe Markets Work 11 Examples of ISV Connectivity to LIFFE CONNECT The following diagrams represent the typical system configuration for access to LIFFE CONNECT via ISV solutions using either a single or multiple API implementation. Single API Implementation Trader Workstation Trading Host (Equity and Financial) EASy or GWAN Equity Gateway Financial Gateway NAT Trading Server API Member s LAN Member s Premises Trader Workstation the Network Address Translator (NAT) represents the demarcation point between the Exchange and the member each trader workstation accesses LIFFE CONNECT via a single API running on the Trading Server Multiple API Implementation Trader Workstation API Trading Host (Equity and Financial) EASy or GWAN Equity Gateway Financial Gateway NAT Member s Network Member s Premises Trader Workstation API the Network Address Translator (NAT) represents the demarcation point between the Exchange and the member each trader workstation accesses LIFFE CONNECT via an independent Euronext.liffe API. Please note that the system diagrams represented above are typical network configurations to which some variations may apply.

16 12 How the Euronext.liffe Markets Work Trade Priority/Matching LIFFE CONNECT matches orders in the central order book.the Trading Host configuration allows the trade matching algorithm to be set by contract. One of the following algorithms will be used: (a) Price and time priority Price: highest bid/lowest offer has priority over orders in the same contract month/strategy Time: the first order at a price has priority over all other orders at the same price which will, in turn, trade according to the time they were accepted by the Trading Host Note:The above algorithm will be used for all Brussels and Paris contracts following migration onto LIFFE CONNECT. (b) Price and pro-rata Price: highest bid/lowest offer has priority over other orders in the same contract month/strategy Pro-rata: all orders at a price have the same priority, orders are filled in proportion to the volume The following variations of the pro-rata algorithm are available: Vanilla Pro-Rata Algorithm The objective of the vanilla pro-rata algorithm is to divide incoming business between all orders at a given price level, with the volume of the business allocated to each trader being in proportion to the amount of volume they have in the market at that price.this contrasts with the price/time algorithm where volume is allocated, at a given price level, on the basis of the time when the order was entered, with the oldest being filled first. Example Given the following orders: Trader 1 Euribor Sell :01 Sep03 at Trader 2 Euribor Sell 20 10:02 Sep03 at Trader 3 Euribor Sell 80 10:03 Sep03 at A new bid of for 110 lots will be allocated in the following way: Trader 1 gets 55 lots vanilla pro-rata (with priority functionality disabled) pro-rata with priority order and no volume cap or minimum volume pro-rata with priority order and a volume cap pro-rata with priority order and a minimum volume requirement pro-rata with a priority order, a volume cap and minimum volume requirement Trader 2 Trader 3 gets 11 lots gets 44 lots

17 How the Euronext.liffe Markets Work 13 Pro-Rata Algorithm with Priority Order The pro-rata algorithm with priority order is closely based on the vanilla pro-rata algorithm described above. However, it allows one order in the order book to be assigned a priority flag for each side of the market. Once the incoming order has traded against the priority order, the pro-rata will operate in the normal fashion. The aim of this mechanism is to encourage traders to improve prices by offering a reward of guaranteed volume in return for price improvement. An order will gain priority status if it creates a price improvement in a market as it enters the order book. Only one order in a particular market can have priority status at any one time.as a result, priority status will be passed to an order that subsequently creates a price improvement prior to the filling of the order that had previously held priority status. There will not always be a priority order. This could occur when the order with priority is fully traded leaving other orders at the same or a worse price. Example Given the following orders: Trader 1 Euribor Sell :01 Sep03 at (Priority) Trader 2 Euribor Sell 20 10:02 Sep03 at A new bid of for 110 lots will be allocated in the following way: Trader 1 Trader 2 Trader 3 sells 100 lots sells 2 lots sells 8 lots Note the difference between this result and the plain vanilla algorithm where no price movement had occurred. Pro-Rata with Priority Order and avolume Cap In order to prevent a priority order locking a particular market, a volume cap is made available within the algorithm. It is possible to specify two volume cap values for each contract, one for outright markets and one for strategy markets. These values represent the amount of value that the priority order will automatically get. Once the volume cap has been hit, any unassigned volume still remaining in the incoming order will be distributed in the normal pro-rata manner. It is possible for the priority order to be allocated additional volume over and above that allowed by the volume cap as a result of the prorata allocation. Trader 3 Euribor Sell 80 10:03 Sep03 at In this case the order of Trader1 is assigned priority as this was the order that created the price movement.

18 14 How the Euronext.liffe Markets Work Example Given the following orders: Trader 1 Euribor Sell :01 Sep03 at (Priority) Trader 2 Euribor Sell 20 10:02 Sep03 at Trader 3 Euribor Sell 80 10:03 Sep03 at Trader1 has made the new best price and his order has been assigned priority status. However, in this case there is a volume cap of 50 lots in operation. A new bid of for 110 lots will be allocated in the following way: Trader 1 Trader 2 Trader 3 sells 70 lots (50 priority + 20 pro-rata) sells 8 lots sells 32 lots Pro-Rata Algorithm with Priority Order and a Minimum Volume Requirement In order to prevent small orders taking priority from large volume orders a minimum volume parameter can be specified.as with the volume cap this is configurable on a per contract basis with separate values being available for outright and strategy markets.a side effect of a minimum volume parameter is that it can result in situations where the best price in a market is not provided by the priority order. Example There is a minimum volume requirement of 20 lots. Given the following orders: Trader 1 Euribor Sell :01 Sep03 at (Priority) Trader 2 Euribor Sell 20 10:02 Sep03 at Trader 3 Euribor Sell 80 10:03 Sep03 at Trader1 has made a new best price and his order has been assigned priority status because his order meets the minimum volume requirement of 20 lots. A new sell order arrives: Trader 4 Euribor Sell 10 10:05 Sep03 at Although Trader 4 has made a new best price the minimum volume requirement has not been met. A new bid of for 110 lots will be allocated in the following way: Trader 4 sells 10 lots at Trader 1 sells 67 lots (50 priority + 17 prorata) at Trader 2 sells 7 lots at Trader 3 sells 26 lots at 97.73

19 How the Euronext.liffe Markets Work 15 6 Entering and Managing Orders Submitting Orders Using their trading application, traders may submit orders to LIFFE CONNECT at any time from the start of the Pre-Open period until the relevant market closes.these orders may be for any contract month, series or strategy the trader need not subscribe to a market to submit an order. However, the relevant member will need to hold the appropriate trading subscription that provides its traders with access to particular contract groups. When an order is submitted to the Trading Host, it is considered firm once the Trading Host has checked and confirmed it as valid. Once this has happened, the order is time stamped by the Trading Host.All orders (with the exception of Market orders) must specify the price of the contract month, series or strategy and the volume to be bought or sold at that price. Orders that do not trade to completion and are not of a type that require immediate completion are stored in the central order book.the order time stamp value is used for subsequent order prioritisation in contracts where the price/time trade-matching algorithm is employed, and where implied strategy trading occurs. Members may either execute business on their own behalf and/or on behalf of clients according to their authorised status. LIFFE CONNECT provides a facility that allows members executing business on behalf of another member to allocate that business directly to the originating member using an account allocation field on their trading application.alternatively, account allocation can be achieved post-trade through Clearing21 or TRS. In the case of the LIFFE market, there is a facility to record client details (eg account number) and the TRS assignment codes (eg House Account) on all orders submitted to the Trading Host.This is not a mandatory field and where there is no entry the trade will be allocated to the House account by default. For the Brussels and Paris markets, an assignment code must be entered and there is no default facility.where an assignment code is not entered the order will be rejected. Price Limits All incoming orders are subject to price limits. These are in place to prevent the execution of orders with manifest pricing errors. Futures and options contracts are treated differently.the separate processes are outlined below: Futures For futures contracts, price limits are calculated from a base level which itself is calculated from a combination of the last trade and the mid-point between the bid and offer for the most actively traded (blue) month, and for the contract months, with reference to spread relationships with the blue month. Options For an individual options contract, the price limits are calculated using a model based on the fair value price calculated. Monitoring Price limits are monitored throughout the trading day and may be adjusted by Market Services officials depending on market conditions. Orders submitted that fall outside price limits will be rejected by the Trading Host and the originating trader will be notified via his trading application. Price limits apply during the market trading period. For futures contracts they are also applied during the Pre-Open period.

20 16 How the Euronext.liffe Markets Work Order Types Orders can be of the following types: Limit orders are executed at the price stated or better. Unless otherwise specified (see GTC, GIS, GTD and IC orders), any residual volume from an incomplete limit order is retained in the central order book until it is withdrawn or traded (or cancelled automatically at the end of the trading day/session). Market orders are executed at the best price(s) available in the market when the order is received until all available volume at that price has been traded.any remaining portion of the order then executes at the next best price and so on, until all the order volume has been filled.any residual volume from an incomplete Market order is immediately cancelled. Market orders will be rejected if the market is not open. Market on Open (MOO) orders may be submitted to the Trading Host during the Pre-Open period. MOO orders will be executed at the calculated opening price at Market Open.Where a MOO order has traded in part at Market Open, the residual volume will be converted to a Limit order at the calculated opening price of that order. If no trading takes place at Market Open, the MOO order will trade with any matching MOO order at the mid-price of the opening bid and offer (including bids and offers implied from related strategy markets where applicable).any residual MOO order volume will then convert to a Limit order at this mid-price.where no bid and/or no offer exists at Market Open, the MOO order will be cancelled by the Trading Host. Contingent Multiple (CMO) orders contain two or more component orders. The trading of any component is contingent on being able to trade fully all components within the contingent order. Contingent orders allow the trading of contract strategies across two separate contracts, therefore allowing traders to submit intercontract spreads to LIFFE CONNECT. They cannot be submitted during the Pre- Open period, as all order components must exist in open markets. In addition there are a number of designated orders which can be of one or more of the above order types: Good til cancelled (GTC) orders remain in the central order book until either they trade, or are withdrawn by the submitting trader, or the contract expires. GTC orders may be entered with or without a cancellation date. If they have an accompanying date they will automatically be cancelled by the system at the end of trading on that date. In the event that a GTC order trades when the trader associated with that order is not logged onto the system, the system will update the order volume, but the trader will not receive a trade notification message. Upon log-on to the system the trader will receive the updated order information from the Trading Host and will need to check his order book to ascertain the order status. GTC orders cannot be transferred to another trader. In the event of a failure a trader may withdraw GTC orders by telephoning the Exchange and instructing exchange officials accordingly. GTC orders are Limit orders.

21 How the Euronext.liffe Markets Work 17 Good in Session (GIS) orders remain in the central order book until either they trade, or are withdrawn by the submitting trader, or the session ends. In the event that a GIS order trades when the trader associated with that order is not logged onto the system, the system will update the order volume, but the trader will not receive a trade notification message. Upon log-on to the system the trader will receive the updated order information from the Trading Host and will need to check his order book to ascertain the order status. GIS orders cannot be transferred to another trader. In the event of a failure a trader may withdraw GIS orders by telephoning the Exchange and instructing exchange officials accordingly. GIS orders are Limit orders. Please note that GIS orders are not valied on the LIFFE market Good til Day (GTD) orders remain in the central order book until either they trade, or are withdrawn by the submitting trader, or the day ends. In the event that a GTD order trades when the trader associated with that order is not logged onto the system, the system will update the order volume, but the trader will not receive a trade notification message. Upon log-on to the system the trader will receive the updated order information from the Trading Host and will need to check his order book to ascertain the order status. GTD orders cannot be transferred to another trader. In the event of a failure a trader may withdraw GTD orders by telephoning the Exchange and instructing exchange officials accordingly. GTD orders are Limit orders. Immediate and Cancel (IC) orders these are executed against any existing orders at the stated price or better, up to the volume of the IC order.any residual volume from the IC order is then immediately cancelled. IC orders can be added to Limit orders and will be added to market orders automatically if no other designation is made. Complete Volume (CV) orders. These orders are only executed if there is sufficient volume available at the stated price or better for them to execute fully. Otherwise the entire order is cancelled. CV orders can be Limit or Market orders. Minimum Volume (MV) orders. Traders may state a minimum volume for an order. If the minimum volume cannot be executed immediately, the whole order is cancelled. Any residual volume from an incomplete MV order is retained in the central order book and will trade as normal (ie with no further minimum volume constraints). Note that MV orders may not be used to execute any prenegotiated business. MV orders can be Limit or Market orders. Order Attributes At the order entry level, three main attributes may be attached to an order: the Order Type the Time Validity Qualifier the Quantity Qualifier Order attributes managed by LIFFE CONNECT are listed in the following table:

22 18 How the Euronext.liffe Markets Work Guaranteed Cross Mechanism for Brussels and Paris Markets Using this function, a trader can enter an order for both sides of a pre-negotiated trade. Subject to certain conditions, these trades will be automatically matched by the Trading Host and do not require individual authorisation from Market Services. This facility can be configured to require the submission of a Request For Quote (RFQ) to the market at a configurable time prior to the execution of the guaranteed cross trade. The following system checks can be configured on a per contract basis.the configured checks must be passed for the order to be accepted. The checks are as follows: Order type Time validity qualifier Quantity Qualifier LIFFE CONNECT Market on Open (MOO) Limit order Stop order (via ISV) Market orders Cross orders Good til Cancelled (GTC) Good in Session (GIS) Immediate and Cancel (IC) Good til Day (GTD) Normal Complete Volume (CV) Minimum Volume (MV) Iceberg (via ISV) an RFQ has been submitted to the market within a configurable time period and the volume of the guaranteed cross order is less than or equal to the RFQ volume the price of the guaranteed cross order is within acceptable limits the volume of the guaranteed cross order must be greater than the minimum configured volume for the contract The acceptable limits for each contract can be configured on a per contract basis with the following options: 1. the trade s price must fall within the market s Best Bid and Offer (BBO) (unless the market is configured to allow trades at the BBO, in which case a trade at BBO must have a volume equal to or greater than a configured volume constraint) 2. the trade will only be allowed if there is at least one bid and at least one offer in the market 3. the trade will be allowed even if the market contains only bids, only offers, or the market is empty A guaranteed cross can only be submitted when the market is in an Open or Pre-Close state. The guaranteed cross trade is validated against buy-side and sell-side combinations of assignment codes.the Trading Host will reject a guaranteed cross if the combination of assignment codes is not a valid combination. Crossing and Pre-negotiated Trading for the LIFFE Market Crossing and the execution of pre-negotiated business in the LIFFE market is permitted. Orders for which matching business has been found by pre-negotiation may be entered to the Trading Host without delay between the submission of the separate buy and sell orders, providing that there is both a bid and offer present in the central order book. Where there is no bid, no offer or neither present for the relevant contract month or strategy, then an RFQ must first be entered for the relevant contract month or strategy.

23 How the Euronext.liffe Markets Work 19 The matching business may only be entered to the Trading Host when a specified period of seconds has elapsed following submission of the RFQ.A bid and/or offer must not be entered to the Trading Host deliberately to circumvent the RFQ requirement. Recognised Strategies on LIFFE CONNECT LIFFE CONNECT is widely regarded as the most sophisticated electronic derivatives trading platform in the world and provides more strategies than any other platform. Full details of the current strategies available for trading on LIFFE CONNECT can be found on our web site. Volatility Trades (Delta Neutral) LIFFE CONNECT supports functionality which allows traders to perform volatility (delta neutral) trades, ie to trade simultaneously an option against the underlying.the following are examples of possible volatility trades: An individual equity option (outright or strategy) against the underlying stock. Any other option traded on Euronext.liffe against the exchange listed future. This allows traders to hedge an option position using the related underlying. allow different account codes for the derivative and cash leg which may be controlled by Exchange rules LIFFE CONNECT can store the valid underlying cash legs that are applicable for each series so that the Trading Host can automatically reject any strategy created market that involved an unrelated derivative and cash leg.where applicable the Trading Host will validate the underlying futures leg or otherwise can be configured to validate the cash leg against the underlying feed and a tick spread limit.this tick spread limit is a configurable parameter that can be increased or reduced dynamically during the trading day by Market Services. Where the cash trade is sent to the trade reporting interface, a mapping can be put in place to ensure that the correct Individual Trader Mnemonic (ITM) and account type are populated. Traders can choose the delta value for volatility orders submitted.the volume of the underlying leg is calculated by the Trading Host based on the submitted delta.the futures leg price and volume is reported to the market with a tag to denote it is a volatility trade. Where the derivatives exchange is a complementary business unit to the cash exchange (for example Brussels and Paris but not London) the LIFFE CONNECT Host can be set up to: report the cash leg of an equity options volatility trade to the cash market participants validate the cash leg of the volatility order upon submission and trade to ensure that it is within an allowable spread of the current market mid-point map different options codes to the cash market codes for the same contract

24 20 How the Euronext.liffe Markets Work Order Management Traders have the ability to do the following via their front-end trading application: Individual Orders: withdraw orders revise orders the Trading Host allows volume, price and Good til Cancelled (GTC) expiry dates to be amended transfer orders individual traders may nominate a replacement ITM view orders see an order book listing active and traded orders Batch Orders: submit up to 16 outright Limit orders in the same contract in a single transaction revise up to 64 outright Limit orders in the same contract in a single transaction pull up to 64 outright or strategy Limit orders in the same contract in a single transaction crossing is not permitted between orders within a single submission or revision transaction on updating a bid and ask, the worsening prices will be revised first in order to avoid the inadvertent matching of orders Wholesale Trading The LIFFE CONNECT live market is complemented by a number of trading facilities that recognise the needs of the wholesale market. These facilities allow traders to negotiate trades bilaterally to support defined trading strategies and submit such trades to the market via LIFFE CONNECT for authorisation by Market Services.These facilities are Against Actuals, Block Trading and Basis Trading. Wholesale trades can be submitted for authorisation via a trader s frontend trading application. Please note that not all wholesale facilities are available on each Euronext.liffe market. FLEX Options Traders may submit FLEX options trades to LIFFE CONNECT via the front-end trading application. FLEX options allow the buyer to specify the style (American or European), strike, maturity and notional principal of an option. Please note that FLEX option functionality is only available on the LIFFE market. Automated Price Injection Models An Automated Price Injection Model (APIM) is defined as an electronic system or computer software which interfaces with the LIFFE CONNECT API and both determines the requirement for sending, and sends, order handling messages to the LIFFE CONNECT Trading Host without necessarily requiring the intervention of an individual. Only those members who have registered the use of an APIM for a specific contract, who are using conformed software and have been approved by Euronext.liffe will be allowed to operate a model in that contract. Termination of a Trading Session and Subsequent Re-Start Trading on LIFFE CONNECT may be suspended if circumstances are preventing the orderly conduct of business. Market Services will send out a message to all market users informing them of such a suspension. In the event that trading on LIFFE CONNECT in one or more contracts is restricted, suspended or halted, the session will be re-started when business may resume in an orderly manner.

25 How the Euronext.liffe Markets Work 21 7 The Trading Day Periods of the Trading Day The following diagram shows the various periods of the trading day. Different contracts have different opening/closing times.the exact timings of the trading day periods for each Euronext.liffe contract can be viewed on and API Messages Trading Day Period Market Mode Messages (Sent to all trading applications that have initialised) Session Start Market Enabled (Sent to all traders subscribed to the relevant market) } } Outside Trading Day Session Start (n) minutes Pre-Open (n) minutes API initialisation followed by standing data requests permitted Logon and subscribe to market permitted Order submission permitted but no trades take place Market Open Uncrossing algorithm Trading Day Market Trading Trading, order handling and settlement Session End Market Closed } } Pre-Close Session End (n) minutes Issue settlement prices Issue settlement prices Time Outside Trading Day All sessions are logged out Read on for details of the activity that takes place at each stage of the trading day as shown in the above diagram.

26 22 How the Euronext.liffe Markets Work Outside the Trading Day Prior to the start of the trading day, for a specified period of minutes (depending on the contract), trading applications will be able to initialise the API. Session Start A message is transmitted a set number of minutes (depending on the contract) before preopening period which is visible to all subscribed LIFFE CONNECT market users.at this time traders are allowed to log-on to LIFFE CONNECT, check communications and view market data. Pre-Open The Pre-Open message is issued to all logged-on users.all order types, except Market orders, are valid, including MOOs, which are only valid during this period.the market depth data created by these orders can be viewed. However, no actual trading takes place. Indicative opening prices are displayed. Market Close At this time trading ceases and all outstanding orders (except GTCs) are deleted from the central order book. No new orders, editing of outstanding orders or withdrawals are accepted. Market Services calculate closing prices and publish them to all customers and QVs and sub-qvs via the Market Feed. Session End At Session End traders can view settlement/closing prices.at the end of this period, all traders are automatically logged-off LIFFE CONNECT. Market Open Market orders can now be entered in addition to Limit orders while MOO orders can no longer be submitted.trading continues for a set period of time. Settlement Settlement prices are calculated for LCH and Clearnet for margining purposes.the timing of these calculations are subject to contract specification. Market Services calculate settlement prices and publish them to all market users and distribute them via the Market Feed which disseminates order and trade information (prices/volumes) to over 60 QVs and sub-qvs world-wide. Designated contracts continue trading during and after settlements.

27 How the Euronext.liffe Markets Work 23 8 The Responsible Person In establishing appropriate trading access arrangements for LIFFE CONNECT, Euronext.liffe has sought to provide members with maximum flexibility whilst continuing to provide a framework for effective regulation.this reflects the open architecture design of LIFFE CONNECT and the potential for members to achieve direct trading access to the system from foreign jurisdictions. 2 In order to conduct business on LIFFE CONNECT, a member will be required to register at least one responsible person with the Euronext.liffe market concerned. All business must be submitted under an Individual Trading Mnemonic (ITM) assigned to a responsible person. Members may also grant trading access to other staff under the supervision of a responsible person, and may provide indirect access to their clients by way of order routing systems. Where trading access is granted to other staff, the member is responsible for ensuring that such staff are suitable, adequately trained and supervised in accordance with member s obligations (see below).where order routing access is granted to clients, the member should ensure that client orders are appropriately vetted before they are submitted to LIFFE CONNECT. In either case, all business must be submitted under an ITM assigned to aresponsible person and under the relevant responsible person s supervision. he/she must be able to identify to Euronext.liffe the immediate source of all orders he/she must ensure as far as possible that business conducted in his/her name complies with the relevant Euronext.liffe Rules and Trading Procedures. A responsible person may be an individual trader. However, the responsible person may instead, or additionally, act in a supervisory capacity, whereby other staff (or clients) submit (or route) orders through his/her ITM(s), under his/her supervision. To reflect the practicalities of staff other than responsible persons potentially being granted by members a form of direct access (albeit under the supervision of responsible persons), it will not be necessary for the responsible person physically to log-on to LIFFE CONNECT themselves. However, the member must implement suitable security measures for passwords and security keys such that only authorised individuals may gain trading access. For further details about any aspect of membership or the use of ITMs please [email protected] or [email protected] or visit or A responsible person is required to fulfil the following obligations in respect of all business submitted under his/her ITM(s): he/she must have the authority to adjust or withdraw any order at Euronext.liffe s request 2 Regulatory restrictions may prevent or condition access in some jurisdictions.

28 24 How the Euronext.liffe Markets Work 9 Implied Spread Trading Strategy Trades Traders may execute strategies comprising combinations of contract months as defined by the market. (A separate strategy market is created for each strategy.) A market maintained algorithm calculates the traded price of each leg. In addition, implied trading functionality is provided in respect of certain strategies traded on LIFFE CONNECT ; both implied-in and implied-out prices are generated. For those explicit strategy markets where implied trading functionality applies, the relevant outright contract months will generate impliedin prices to the explicit strategy market.where these implied-in prices represent the best price for a strategy, they will be traded subject to the trade matching algorithm which applies to the contract in question. For outright contract month markets, the interaction of an explicit strategy order and a relevant outright contract month order(s) will generate an implied-out price in the other outright contract month.where an implied-out price generated by the Trading Host is better than that available in the outright contract month, the order will be traded, again subject to the relevant trade matching algorithm, provided the other leg of the explicit strategy can still be traded at the same time. Implied-in Pricing, Calendar Spread Month Dec Mar Bid Ask In this example, two explicit quotes are entered. This creates an implied-in strategy bid in Dec/Mar of This price is calculated and held in the Trading Host.An incoming strategy that is entered and matches this price will automatically trade against the explicit outright legs that formed the implied strategy. Implied-out Pricing, Calendar Spread Month Dec Mar Dissemination of Implied Prices The LIFFE CONNECT Trading Host generates both implied-in and implied-out prices. However, only implied-out prices and only those which represent the current best market price are distributed via the LIFFE CONNECT API. Similarly, implied-out prices are disseminated via the Market Feed while implied-in prices are not. However, all ISV software is conformed to calculate and display implied-in prices. Bid Ask Strategy Dec/Mar Bid

29 How the Euronext.liffe Markets Work 25 In this example, two explicit outrights have been entered in addition to an explicit strategy.the implied quotes generated by the Trading Host are shaded.any trade with the implied quote will automatically facilitate the strategy trade with the explicit leg. Implied Pricing, Calendar Spread Where implied quotes trade with each other a form of limited chaining may prevent market display of seemingly crossed markets (bid>ask). This also leads to situations where incoming explicit orders take priority over improved implied quotes.this situation is only created if implied quotes are not matched with explicit prices. Explicit prices cannot be traded through. Implied-in Pricing, Butterfly Strategies An implied-in price for a butterfly strategy will be calculated from explicit outright leg prices. Bid Mar Ask Jun Month Dec Mar Jun Sep Bid Ask Bid = (80-72) (72-60) = -4 Ask = (81-70) (70-61) = +2 Strategy Dec/Mar Ask Mar/Jun Ask In the above example, explicit prices are entered in Dec, Dec/Mar and Mar/Jun.The Jun bid is not shown, as its parent is an implied-out price. However a Jun ask at a price at or below will trade with the hidden implied price. Therefore, the Mar/Jun/Sep implied butterfly is 4 bid/ +2 offer.any implied-out leg prices will be ignored in this calculation.they can also be traded through.an implied-in butterfly will trade with matching explicit butterfly quotes.any price improvement will only be given to the incoming order that triggers the trade, whether it is a butterfly quote or an incoming leg price. In the above example, an incoming explicit butterfly quote of +3 bid would trade at the offer price ie +2.

30 26 How the Euronext.liffe Markets Work 10 Settlement Prices and Clearing Process An Overview Executed trade details are fed from the Trading Host into TRS (for the LIFFE market) and Clearing21 (for the Brussels and Paris derivatives markets) in real-time throughout the trading day. TRS is the LIFFE market s administration system that allows complete post-trade processing by member s back office departments.trs provides various facilities, including the registration and allocation of trades.trades are then passed through to the CPS. CPS extends the functions of TRS by providing position maintenance and clearing functions, enabling customers to coordinate their trading, settlement, margining and risk management within one system.all trades executed in the LIFFE market will match instantly in TRS and will be cleared at the London Clearing House. Clearing21 is the equivalent of TRS and CPS for the Brussels and Paris derivatives markets and is the clearing technology of Clearnet, who clear these contracts. Clearing21 is an open architecture clearing system, providing dialogue between the members' internal computer systems and Clearnet. It is a real-time operation which enables market participants to better manage their positions and risks with detailed position keeping, allowing for balancing between unit accounts in the position keepers' books and those managed by Clearnet. TRS, CPS and Clearing21 can be used to perform the following clearing operations: postings and give-ups position keeping by account management of an account base (opening, modification, closure) actions on position (exercise, abandonment, assignments) adjustments (corrections, transfers, offsets) calculation of margins and premiums calculation of initial margins (SPAN method) Daily Settlements Settlement prices are the official prices for all derivatives at which all open positions are revalued for the purposes of profit and loss and subsequent margin calculation at the end of the business day.the margining system is the means by which LCH and Clearnet control the risk associated with a clearing member s position on a daily basis. The prices established will be transmitted to LCH or Clearnet. In the event that LCH or Clearnet considers that prices do not correctly reflect the true value of contracts within the market, it may require the market to amend prices as appropriate. Final settlement prices will be displayed on LIFFE CONNECT. Please note that UK options settlement prices are calculated using the US format of the Cox-Ross model and Continental options settlement prices are calculated using the European format of the Cox-Ross model.

31 Contacts For more information about LIFFE CONNECT please contact: web:

32 Euronext, LIFFE and Euronext.liffe Euronext was formed by the merger of the Amsterdam, Brussels and Paris cash and derivatives exchanges in September The Euronext Group has since grown further, adding BVLP (the Portuguese cash and derivatives exchange) and LIFFE (The London International Financial Futures and Options Exchange).The derivatives businesses of Euronext and LIFFE are being combined under the Euronext.liffe umbrella with the phased migration of all of Euronext s derivatives markets to LIFFE CONNECT, the most sophisticated electronic derivatives trading platform in the world. Amsterdam P.O. Box GD Amsterdam The Netherlands tel +31 (0) fax +31 (0) Brussels Palais de la Bourse/Beurspaleis Place de la Bourse/Beursplein 1000 Brussels Belgium tel +32 (0) fax +32 (0) Lisbon Rua Soeiro Pereira Gomes Edifício da Bolsa Lisbon Portugal tel fax London Cannon Bridge House 1 Cousin Lane London EC4R 3XX United Kingdom tel +44 (0) fax +44 (0) Professional November 2002 Paris 39, rue Cambon Paris cedex 01 France tel +33 (0) fax +33 (0) /Apr 03/5000/US