Xetra

What is Xetra?

Xetra is the fully electronic trading venue of the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse), whose operator is Deutsche Börse AG. Shares, exchange-traded funds (ETFs) and other securities are traded on Xetra in a central order book, an electronic list of all buy and sell orders. The name originally stands for "Exchange Electronic Trading"; the system has been in operation since 1997.

For an unlisted technology company, Xetra matters for three reasons. In an IPO, Xetra is where the shares are traded after the first stock exchange price (first listing). In business valuation, Xetra prices of listed comparable companies provide reference values for multiples, that is, ratios such as enterprise value to revenue. And in a sale to a listed acquirer, they determine the value of a purchase price that is paid wholly or partly in shares.

How trading works

Buy and sell orders are matched in the central order book by price and time of receipt. The trading day begins with an opening auction, followed by continuous trading, interrupted by a mid-day auction, and ends with a closing auction. The closing price determined there serves as a reference for indices, fund valuations and contracts. The indices of the DAX family are calculated on the basis of Xetra prices.

In the event of sharp price swings, the system interrupts continuous trading for a short auction (volatility interruption) so that a new price can form. For less liquid stocks, issuers can appoint designated sponsors, usually banks or securities trading firms, which quote binding buy and sell prices and thereby ensure tradable prices. Alongside Xetra, the Frankfurt Stock Exchange operates a further trading venue, Boerse Frankfurt (Börse Frankfurt), on which specialists support price determination.

Market segments and ongoing obligations

Xetra is a trading system, not a market segment. The obligations of an issuer (the company whose securities are traded) depend on the segment in which its shares are admitted or included:

• Regulated Market: statutorily regulated segment with admission by the exchange. Issuers publish annual and half-yearly financial reports (consolidated financial statements under IFRS, where they are required to prepare them) and are subject to the notification duties for voting rights as well as to takeover law.
• Prime Standard: sub-segment of the Regulated Market with additional obligations, including quarterly statements, reporting in English as well and at least one analyst event per year. Admission to the indices of the DAX family is additionally subject to the index rules of Deutsche Börse as amended from time to time.
• Open Market (Freiverkehr): segment organised under private law by the exchange with lower requirements, including the Scale segment for small and medium-sized companies.

Irrespective of the segment, the rules of the European Market Abuse Regulation apply to issuers whose shares are traded with their consent. These include ad hoc disclosure, that is, the duty to publish price-sensitive inside information without delay, as well as insider lists and notification duties for transactions by managers. The details of the segment requirements change and are to be taken from the stock exchange rules in force at the time.

The route to the stock exchange

Shares can only be issued by a stock corporation (Aktiengesellschaft), a partnership limited by shares (Kommanditgesellschaft auf Aktien, KGaA) or a European company (Societas Europaea, SE). Before an IPO, a GmbH (German limited liability company) has to change its legal form under the German Transformation Act (Umwandlungsgesetz), set up a supervisory board and adapt its articles of association to stock corporation law. For the public offering and the admission to the Regulated Market, a securities prospectus approved by the financial supervisory authority BaFin is generally required. It is preceded by extensive due diligence by issuing banks and law firms.

The existing shareholders generally undertake towards the issuing banks not to sell their shares for a certain period; lock-up periods of six to twelve months are common. An IPO is therefore not an immediate exit but primarily a capital raise followed by tradability. A listing without the issue of new shares is possible as a direct listing.

Worked example

A listed acquirer buys a software company for EUR 40 million. Of this, EUR 30 million is paid in cash and EUR 10 million in new shares of the acquirer. The reference price is the volume-weighted average price on Xetra over the 20 trading days before signing, that is, the average of the prices weighted by the number of shares traded in each case. It is EUR 25.00. By closing, the price falls to EUR 22.50.

• Fixed number of shares based on the reference price: 10,000,000 / 25.00 = 400,000 shares
• Value of these shares at closing: 400,000 × 22.50 = EUR 9,000,000; the sellers bear a shortfall in value of EUR 1,000,000, that is, 10% of the share component
• Fixed value with the number of shares determined at closing: 10,000,000 / 22.50 = 444,444.44, so 444,444 shares
• Value at closing: 444,444 × 22.50 = EUR 9,999,990; the difference of EUR 10 is settled in cash

In the second case, the acquirer bears the price risk until closing, because it issues 44,444 more shares. After closing, the sellers are often subject to a lock-up period; they bear the price risk of that period themselves in both cases. To limit it, price bands (collars) within which the number of shares stays fixed are sometimes agreed.

Distinctions from related terms

• Boerse Frankfurt (Börse Frankfurt): the second trading venue of the Frankfurt Stock Exchange, on which specialists accompany price determination. Xetra works without specialists, with a fully electronic order book.
• Market segment: the legal framework with admission and ongoing obligations, such as the Regulated Market, the Prime Standard or the Open Market. Xetra is the technical trading system through which stocks of different segments are traded.
• IPO: the process of the first placement and admission of shares. Xetra is the trading venue on which the shares are traded afterwards.

Common mistakes

• Confusing trading venue and segment. The obligations of an issuer follow from the market segment, not from the trading system Xetra.
• Planning an IPO as an exit. Lock-up periods and limited trading volumes generally do not allow a quick sale of larger blocks.
• Overestimating capital market readiness. Consolidated financial statements under IFRS, short reporting deadlines and a robust internal control system have to be in place before the IPO, not after it.
• Underestimating ongoing costs. Reporting, investor relations, audit, legal advice and exchange fees arise every year, regardless of the share price development.
• Reference price left unregulated. If a purchase price in shares is agreed without fixing the period and calculation of the reference price, it remains open who bears the price risk.

Frequently asked questions

Is Xetra a stock exchange?

No. Xetra is a trading venue of the Frankfurt Stock Exchange. The exchange is the institution under public law, Deutsche Börse AG is its operator and the operator of the systems.

Can shares in a GmbH be traded on Xetra?

No. GmbH shares (Geschäftsanteile) are not exchange-tradable, and their transfer requires notarial certification. For a listing, the company must first be converted into a stock corporation, a KGaA or an SE.

What is the Xetra closing price?

The price determined in the closing auction of the trading day. It serves as a reference for index levels, valuations and contractual provisions, for example for reference prices in purchase agreements.

Why are Xetra prices relevant for unlisted companies?

Because they provide the basis for valuations using multiples. Key figures such as the revenue multiple are derived from the prices of listed comparable companies and serve as one of several references in funding rounds and sale processes.

The Roemer Capital view

For the technology companies that Roemer Capital advises, an IPO is rarely the next step; a funding round or a sale is more likely. Xetra nevertheless comes up regularly: Roemer Capital uses the prices of listed comparable companies as one reference for valuation and classifies them cautiously because of size, growth and tradability.

If a listed acquirer offers shares as part of the purchase price in a trade sale, Roemer Capital calculates the variants of reference price, number of shares and lock-up period for the sellers. This makes clear before signing which part of the purchase price depends on the share price development.