What Is Freiverkehr?
Freiverkehr, also known as the Open Market, is a segment of a stock exchange in Germany that operates with fewer regulations and lower disclosure requirements compared to the country's main regulated markets. It is an important part of the overall market segmentation within German capital markets, designed to provide a trading venue for securities that might not meet the stringent criteria for listing on the highly regulated segments. While Freiverkehr is an exchange-organized market, it is categorized under private law and is not an "organized market" in the sense of the EU's Markets in Financial Instruments Directive (MiFID II). This structure aims to balance access to equity capital for a wider range of companies with adequate, albeit different, market supervision. The Freiverkehr facilitates the public trading of various financial instruments, including shares, bonds, and certificates.
History and Origin
The origins of Freiverkehr can be traced back to the informal, "curbstone" trading that occurred outside official stock exchange venues in earlier centuries, where securities not admitted to the formal market were exchanged. In Germany, this unofficial trading evolved into a more structured segment within the broader stock exchange framework. The Frankfurt Stock Exchange, for instance, has a long history dating back to medieval trade fairs, where initial informal dealings eventually led to the establishment of organized trading in various financial instruments.24, 25 Over time, as formal regulations increased for the primary market segments, a need persisted for a more accessible trading venue.
In October 2005, the Freiverkehr segment at the Frankfurt Stock Exchange was officially rebranded as the "Open Market" to reflect its international character and clearer distinction from the strictly regulated markets.22, 23 Despite the rebranding, its fundamental role as a less regulated, exchange-organized segment for securities remains consistent.
Key Takeaways
- Freiverkehr is an exchange-organized market segment in Germany with fewer regulatory requirements than the regulated market.
- It provides a platform for companies, often smaller ones, to raise equity capital without undergoing the full obligations of a main market listing.
- Securities traded in Freiverkehr are subject to lower disclosure requirements and may exhibit reduced liquidity.
- Investors in Freiverkehr typically face higher risks due to the less stringent oversight and limited information available.
- It operates under private law rules set by the exchange, rather than public law governing fully regulated markets.
Interpreting the Freiverkehr
Understanding Freiverkehr requires recognizing its dual nature: it is organized by the stock exchange, but it is not a "regulated market" in the traditional sense under EU law. For companies, Freiverkehr offers a more straightforward and less costly path to accessing public trading and raising capital, especially for those that are newer, smaller, or from foreign jurisdictions. This ease of entry comes with fewer ongoing disclosure requirements.
For investors, participation in Freiverkehr means accepting a potentially higher level of risk tolerance. While it can offer opportunities in less-discovered companies or niche financial instruments, the reduced transparency and lower liquidity demand more thorough due diligence. The price discovery process in Freiverkehr might also be less robust than in more liquid, regulated markets, making prices potentially more volatile.
Hypothetical Example
Consider "AlphaTech GmbH," a fictional small German software startup seeking to raise €5 million in equity capital to fund its expansion. AlphaTech is not yet large enough to meet the strict criteria for a full listing on the regulated market, which would involve substantial costs and extensive disclosure requirements for an initial public offering.
Instead, AlphaTech decides to seek admission to Freiverkehr. The listing process is simpler, faster, and less expensive. While AlphaTech still provides some information to the exchange and to investors, it avoids the burden of a full prospectus required for regulated markets. This allows them to tap into a pool of investors willing to accept higher risk for potential higher rewards, including private investors and specialized funds. However, the trading volume for AlphaTech's shares on Freiverkehr might be lower, resulting in less liquidity compared to a fully listed stock.
Practical Applications
Freiverkehr serves several practical applications within the German financial landscape:
- Capital Raising for SMEs: It acts as a crucial pathway for small and medium-sized enterprises (SMEs) and start-ups to access public capital markets without the prohibitive costs and regulatory burdens of a regulated market listing.
- Trading Foreign Securities: A significant portion of trading in Freiverkehr involves foreign shares, bonds, and other financial instruments that may not be primarily listed or meet listing requirements on Germany's main regulated segments.
- Niche Investments: It offers investors access to a broader universe of companies and securities, including less conventional or highly speculative opportunities, which might not be found elsewhere on the stock exchange.
- Transition Market: For some companies, Freiverkehr can serve as an interim step before pursuing a full listing on a more regulated segment, allowing them to gain initial public trading experience.
- Market for Specialized Products: It is a venue for various certificates, warrants, and other structured products. For instance, the "Scale" segment within the Open Market (Freiverkehr) aims to attract growth companies with increased transparency standards. R21ecent market developments in Germany highlight efforts by bourses to enhance their market share, often involving segments like Scale within the Open Market.
20## Limitations and Criticisms
While Freiverkehr offers accessibility, it comes with notable limitations and criticisms, primarily stemming from its less stringent regulatory oversight:
- Reduced Investor Protection: Due to lower disclosure requirements, investors have access to less comprehensive information about companies trading in Freiverkehr compared to those on regulated markets. This necessitates greater due diligence on the part of the investor.
- Lower Liquidity: Securities in Freiverkehr often have lower trading volumes, which can lead to wider bid-ask spreads and difficulty in buying or selling large blocks of shares without significantly impacting prices, affecting liquidity.
- Higher Volatility and Risk: The combination of limited information and lower liquidity can lead to higher price volatility and increased investment risk. This environment may also be more susceptible to market manipulation. The German Federal Financial Supervisory Authority (BaFin) issues warnings regarding the "grey capital market," which includes such less-regulated segments, emphasizing the increased risks for investors.
*18, 19 Less Transparency: Companies in Freiverkehr are generally not required to publish a full listing prospectus with detailed company information, as is mandatory for the regulated market. W17hile the Market Abuse Regulation (MAR) introduced ad hoc publicity obligations for companies in Freiverkehr if they consented to trading, the overall level of public information remains lower.
15, 16## Freiverkehr vs. Regulated Market
The primary distinction between Freiverkehr and a regulated market lies in their respective levels of regulatory oversight and investor protection.
| Feature | Freiverkehr (Open Market) | Regulated Market (e.g., Prime Standard, General Standard) |
|---|---|---|
| Legal Basis | Private law; an exchange-organized market, but not an "organized market" under EU law. 14 | Public law; an "organized market" under EU law (MiFID II). 13 |
| Regulation | Less stringent rules set by the exchange (e.g., Deutsche Börse). 12 | Highly regulated by national and EU law. 11 |
| Transparency | Lower disclosure requirements; no mandatory listing prospectus. 10 | High transparency standards; mandatory listing prospectus and ongoing reporting. |
| 9 | Entry Barriers | Lower costs and fewer formal requirements for companies seeking admission. 8 |
| Liquidity | Generally lower, leading to potentially wider bid-ask spreads. 6 | Typically higher, facilitating more efficient price discovery. 5 |
| Risk | Higher risk for investors due to limited information and less regulatory oversight. | Lower risk profile for investors due to comprehensive regulations and information. 4 |
FAQs
Who can trade on Freiverkehr?
Both institutional and private investors can trade on Freiverkehr through their brokers. However, it is generally recommended for investors with a higher risk tolerance and a strong understanding of the associated risks due to the less stringent disclosure requirements.
What types of securities are traded in Freiverkehr?
Freiverkehr includes a wide array of financial instruments, such as German and foreign shares, corporate and government bonds, exchange-traded funds (ETFs), certificates, and warrants. It often serves as a venue for securities that are not listed on more regulated segments.
#3## Is Freiverkehr part of a recognized stock exchange?
Yes, Freiverkehr (known as Open Market) is an official segment organized and operated by exchanges like the Frankfurt Stock Exchange. Ho1, 2wever, it operates under different rules than the publicly regulated market segments and is not considered an "organized market" under certain regulatory definitions, which affects the level of investor protection and regulatory oversight.