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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. PAGE 14
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 In conclusion, a fast implementation of an advanced mature market exchange model can be harmful to the long term development of an emerging market as it may result in inefficiencies along the entire securities value chain. Moving too fast could result in defining strict rules and regulations that are misinterpreted by the market and become impossible to fulfil. Another example is that the exchange develops too advanced products that the market does not understand. Based on experience from working with our own markets and consultancy assignments within emerging markets, OMX recommends the following steps to enable the smooth development of emerging markets: • Understand which development phase your market is in. Identify the bottlenecks and the most essential development steps for this phase to improve market efficiency. • Learn from others. But adapt and simplify existing models and theories to fit the local market. Harmonize with international standards where possible and explain the key market differences to international investors. • Clarify the roles and responsibilities of the market stakeholders, understand the key drivers, and address the entire value chain in the development work. • Build transparency and trust to secure both domestic and international confidence in the market. These recommendations increase the probability of improving securities market efficiency, and facilitate prioritization and accomplishment of development initiatives. About OMX OMX is a leading expert in the exchange industry. Through the Nordic Exchange in Copenhagen, Stockholm, Helsinki, Iceland, Riga, Tallinn and Vilnius, OMX offers access to approximately 80 percent of the Nordic and Baltic securities market. Our integrated technology solutions span the transaction chain enabling efficient securities transactions. With more than 60 customers in over 50 countries, OMX is the world’s foremost provider of marketplace solutions for exchanges, clearing organizations and central securities depositories. OMX is a Nordic Large Cap company in the Financial sector on the OMX Nordic Exchange. For more information, please visit www.omxgroup.com No. 1 in marketplace solutions Widely known for our electronic trading platforms, OMX provides world leading technology solutions across the transaction chain. Our systems and services are designed to help exchanges, clearing organizations and central securities depositories meet the extreme demands of the securities industry with efficiency and flexibility. OMX leverages its expertise to develop solutions that are in sync with today’s fast evolving financial markets and changing technology standards. We offer systems, systems support, operational services, and advisory services that promote efficient securities transactions. Through advisory services OMX offers business insight gathered by people in the exchange industry, delivered by people within the exchange industry. The advisory team brings together: • Exchange and securities industry professionals • Industry technology experts • Management consulting professionals OMX is working world-wide, advising clients from the entire value chain. Projects are run in both mature markets and emerging markets. CONTACT INFORMATION Contact Name Mr. Adam Kostyal E-mail adam.kostyal@omxgroup.com Website www.omxgroup.com PAGE 15
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