© 2008 NYSE Euronext. All Rights Reserved.

Innovation on Warrants & CertificatesDecember 2008

Alicia Suminski

Structured Products

NYSE Euronext

© 2008 NYSE Euronext. All Rights Reserved.

Bring clarity to the market: tool to generate product segmentation

ProductListingUniversalGateway

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PLUG : bringing clarity to the market

New listing interface

• PLUG is an automated interface for warrants and certificates issuance management between NYSE Euronext and Issuers systems :

– Increase admissions (STP process) by

• Saving time in control process on issuer side

• Shorten time to market: issuing to trading in one step

– Ensure better quality of the information by

• Limiting manual work load: less errors

• Increasing automatic controls

• Flexibility of data product management

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Product segmentation

Warrants & Certificates ETVs ETFs

Investment products Leverage products

Yield enhancement

Capital protection

Performance tracking

Strategy

Bear indexation

Plain vanilla warrants

Spread

Digital double knock-outs

Knock out products

Pure indexation

© 2008 NYSE Euronext. All Rights Reserved.

A new market model

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DescriptionAn open order book bound by the liquidity provider quotes

An adapted environment for issuers • New functionalities: Bulk quote, bid-only flag, refresh mechanism, automatic purge following

disconnection• Prices always determined by the liquidity provider quote

For the benefit of end investors• Price reliability: consistency of bid/ask quotes in the order book• Price availability: unjustified market halts will be reduced (replacement of trading thresholds by liquidity

provider quotes)• Erroneous transaction price occurrences greatly reduced (no trades possibly when the liquidity provider is

not present in the order book• Better price quality:

– New quality indicators built into the trading engine– For certain products: smart refresh mechanism, reducing the occurrence of latency arbitrage and mechanically

enabling liquidity providers to offer tighter bid/offer spreads– Book building is still possible, clients can still trade with each other at or inside the liquidity provider quotes– Transaction prices can be improved at the time of execution

Pending regulatory approval

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•General case– The issuer provides a continuous bid/offer spread to the market

– As soon as the liquidity provider is absent from the book; the product is reserved: investors may still place resting orders in the order book

– The liquidity provider receives an AFQ (Ask For Quote) message every time a product is reserved and then at regular intervals if he persists in not re-sending a new quote

– Orders sent by the liquidity provider are firm when they hit the order book, orders sent by the liquidity provider can aggress any orders in the book thus leading to immediate executions

– Transaction prices are dictated by the liquidity provider orders, no longer by the order that has the earliest timestamp

– Investors can trade with each other at or within the liquidity provider bid/ask quote

– Bid-only and offer-only situations are identified with a specific flag within the market feed– Bid-only and offer-only situations are stopped automatically as soon as the liquidity provider

sends and offer (in bid-only situations) or a bid (in offer-only situations)

– The liquidity provider does not have absolute priority in the order book

New market modelPrinciples

Pending regulatory approval

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• For products benefiting from the smart refresh mechanism : RFE– Orders sent by the liquidity provider are firm when they hit the order book

– The balance of unexecuted liquidity provider quotes is indicative• Is disseminated in the market with an «indicative quote» flag• Cannot be aggressed by an incoming order during the «refresh period»

– An RFE message is always sent when an executable order hits the book (whether matching a liquidity provider quote or a client quote), the RFE is devoid of any market sensitive information (price, side, size)

– The liquidity provider is required to respond to an RFE message with a bulk quote that includes at the minimum both the bid and ask on that particular instrument (it may include orders on other instruments)

– The liquidity provider maintains his priority in the order book if he does not degrade his original quote when responding to an RFE

– The responding liquidity provider quote will aggress all orders in the book whether they were at the source of the RFE or not

– Transactions will be executed following the classic price/time priority rules; as soon as a new quote is entered by the liquidity provider or at the end of the “refresh” period

– If the liquidity provider fails to respond to the RFE with a new quote: the transaction will be executed on the basis of the last indicative liquidity provider quote available in the book

New market modelPrinciples

Pending regulatory approval

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IllustrationSmart refresh mechanism

Order LP Order

RFE message

Order

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Execution confirmation

Achat 1.000 XYZ à 0.08

EXECUTION1.000 XYZ at 0.08

Liquidity provider Client Liquidity provider

XYZ order book

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Order type

Bid quantity

Bid price Offer price

Offer quantity

Order type

LP 10.000 0.07 0.08 10.000 LP

1.000 0.06 0.09 1.500

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POSSIBLE MATCH

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EXECUTION

Client

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Order type

Bid quantity

Bid price Offer price

Offer quantity

Order type

LP 10.000 0.07 0.08 9.000 LP

1.000 0.06 0.09 1.500

0.07 – 0.08

The LP re-sends 0.07/0.08: the client is immediately executed at 0.08

The LP re-sends 0.08/0.09: the client order is placed in the order book, it has priority

The LP re-sends 0.06/0.07: the client is immediately executed (and improved) at 0.07

The LP does not re-send an order: the client is executed at 0.08 at the end of the « refresh period »

Pending regulatory approval

© 2008 NYSE Euronext. All Rights Reserved.

Market quality indicators

New indicators

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Liquidity indicatorsDevelopment of new tools : transparency for the end investor

– A certain number of indicators will be disseminated to the market via our internet website

– Execution ratio• Presence time• Average spread and size

– Offering precious information to investors concerning the quality of the service offered by issuers

• Indicator description– Execution ratio

• Number of executions/number of RFEs sent

– Spread reliability• Comparison between the spread pre and post RFE

– LP presence• % of the day during which the LP was present

– Avg bid/offer spread– Average quantity

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At the product look up level

Information on the indicator

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At the instrumentlevel