Download - FEAS

FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007
OMX
Markus Gerdien
President Market Technology
The markets in the FEAS region experience
fast and strong economic progress, and the
securities markets are important enablers in
their development.
DEVELOPING AN EFFICIENT
SECURITIES MARKET
The markets within the Federation of Euro-
Asia Stock Exchange Exchanges (FEAS) are
expanding fast and there is a strong drive to
rapidly develop the securities markets.
It might be tempting to push for a fast
development process and try to mirror key
features of an exchange in a mature market.
However, a mature market exchange model
may be too advanced for an emerging market
structure and by pushing ahead with this
model there is a large risk of combining old
routines and simple processes with a new
advanced market model. The exchange could
face problems utilizing the advanced
functions and products, and it risks becoming
out of synch with the rest of the market.
A typical example of this could be setting up a
derivatives market without adequate liquidity
in the underlying market.
OMX believes that it is possible to enable the
smooth development of emerging securities
markets by focusing on a number of key
issues. It is of the utmost importance to be
aware of and adapt to the development
phases of the local market, and also take into
account the development of all stakeholders
in the securities value chain.
Today, most of the FEAS member
organizations have approximately ten years of
history as independent securities markets.
The markets in this region experience fast and
strong economic progress, and the securities
markets are important enablers in their
development. But still some securities
markets have remaining issues which affect
their efficiency. Some common issues are:
• Low liquidity
• Underdeveloped infrastructure and
transparency of the stock market
• Low free float ratio and centralized
ownership
• Lack of diversification among investors
• Regulation not aligned with the fast
development of the financial market
• Market infrastructure not corresponding to
the needs of the securities market
There are many ways to approach these
issues. Some common questions are: Where
do we start? How do we prioritize among all
planned and ongoing initiatives? What is
important when?
An easy way to answer many of these
questions might be to choose an exchange
with a mature and well functioning securities
market as a role model and try to learn from
its experiences. Such a model could provide
guidance for advanced trading technology, a
package of strict rules and regulations,
advanced products and instruments etc. But
the result will in many cases be disappointing
as the expected results may not materialize.
The key insight is to understand that
improving the liquidity in a market requires the
entire transaction chain to work well together.
Participants of the market, (members, issuers,
etc…), as well as central bodies, (Central
Bank, FSA etc...), and the marketplace itself,
(exchange, CSD); all need to be aligned to
develop an efficient securities market.
Another potential problem resulting from an
immediate implementation of an advanced
model is the different development phases of
an emerging market and a mature market.
Most of the emerging markets are in the midst
of an “awareness phase”, (see graph below),
with the critical focus on educating retail
investors and institutional investors on the
securities market. The focus of the mature
markets, however, is to grow the market
further and to expand cross-border activities,
generating demand for more advanced
solutions.
Maturity,
Volume
Step E
Step D
Step C
Step B
PHASE 1 PHASE 2 PHASE 3 PHASE 4
Established necessary
conditions
Step A
Create awareness
and investment
opportunities
Create critical
investor mass
Grow market and
expand cross -
border
Time
Figure 1. The OMX definition of the four
development phases of a securities market.
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