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The first day on the stock exchange

The first day on the stock exchange

Almost everyone knows these types of photos: a company's CEO rings the bell on the trading floor in Frankfurt. With the first pricing, a month-long issuing process comes to an end and trading on the stock exchange has begun. But how is the first stock exchange price determined? And what role does the stock exchange play in this?

Klaus Schäfer (CEO, Uniper SE) rang the opening bell at the IPO event. Mr. Schäfer is pictured with Hauke Stars (Member of the Executive Board, Deutsche Börse AG).

On the day of the IPO, a company's shares are traded publicly for the first time and from then on can be bought and sold by investors within the framework of publicly regulated and monitored trading. By this time, the company's capital raising has already been completed with  the company already having sold its shares to investors in advance - in the so-called issue or Primary Market. With the first day on the stock exchange, trading of the company shares in the Secondary Market begins. A number of players have accompanied the process until then.

Players in the IPO process

  • The issuer, i.e. the company whose shares will be traded on the stock exchange, issues shares and offers them with the help of a bank consortium to interested investors before the IPO (so-called subscription).
  • Syndicate banks support the issuer in the sale of its securities and in the organisation of the IPO and, together with the issuer, assume liability for the prospectus.
  • If the issuer is supported by a number of syndicate banks, the lead manager will coordinate the distribution of tasks between the other syndicate banks and the issuer.
  • The trading participants connected to the electronic trading system of Deutsche Börse submit their buy or sell offers via computer in the form of orders, which are collected in the electronic order book of the stock exchange. The orders are the basis for determining price matching.
  • The Specialist is a trading participant commissioned by the stock exchange who ensures the continuous tradability of all available securities in floor trading on the Frankfurt Stock Exchange.
  • Designated Sponsors are also trading participants commissioned by the Exchange who ensure sufficient supply and demand in Xetra trading and thus keep the securities they manage tradable.
  • Deutsche Börse's Listing division is responsible for the formal process of admission to trading.
  • The Management Board of the Frankfurt Stock Exchange approves the admission of the issuer's securities to trading.
  • Deutsche Börse's Market Operations department accompanies the IPO and handles communication with trading participants until the first price is fixed. 
  • The Trading Surveillance Office (HÜSt) of the Frankfurt Stock Exchange monitors the first price and subsequently the entire trading process and all other price determinations.


The path to the first trading day

Podcast [German only]

"Myths about IPOs"

Podcast (2:52) with Cord Gebhardt, Management Board of the Frankfurt Stock Exchange

Formally seen, the IPO starts with two administrative procedures for which two different authorities are responsible in Germany. Initially, the Federal Financial Supervisory Authority (BaFin) examines the prospectus prepared by the issuer and the syndicate bank. If the prospectus meets all formal legal requirements, BaFin grants permission to offer the securities to the public. This allows potential investors to subscribe to the shares prior to the start of trading.

The Management Board of the Frankfurt Stock Exchange then checks whether the issuer and its securities meet the legal admission requirements for stock exchange trading. Practically, this task is supervised by the Listing department of Deutsche Börse. Once all formal admission requirements have been met, the Management Board of the Frankfurt Stock Exchange grants admission for trading. The admission is similar to a building permit: the formalities are correct. However, this does not imply a confirmation or even guarantee that the building can also be operated economically.

Throughout the entire process, syndicate banks accompany the issuer. The banks have an important role to play: together with the issuer, they assume the so-called prospectus liability, meaning that they are liable for the information given in the issue prospectus.

The IPO event

 

The day of the IPO

On the day of the IPO, the pre-trading phase starts at 7:30. Trading participants can now place their orders. At 9:00, Xetra trading starts with the opening auction for the IPO: price indications are now calculated continuously and published via the trading system and the investor portal boerse-frankfurt.de. During this call phase, trading participants can continue to enter, change or delete orders. The opening auction lasts a minimum of 15 minutes, afterwards the trading system determines the first price of the share according to the principle of highest volume transacted

However, if there are too strong deviations from the issue price of the share, a volatility interruption occurs before the first price is determined. In this case, the opening auction is extended by about two minutes. This gives market participants time for orientation and prevents the market from running in one direction without reflection.

The bell ringing

As soon as the trading system has determined the first price, the Specialist on the trading floor announces it. The price announcement serves as information for the audience. Following this, a board member of the newcomer rings the bell.

Trading on the Frankfurt Stock Exchange

Now regular trading is starting and trading participants can enter their buy and sell orders continuously. On the Frankfurt Stock Exchange, they can choose between two different trading venues: Xetra and Börse Frankfurt floor trading. 

Very liquid securities are normally offered on both markets. Less liquid securities are only traded on Börse Frankfurt, where specialists ensure continuous tradability. 

The now continuously determined prices reflect the value that investors attribute to the shares - and thus to the company.