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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2007OMXMarkus GerdienPresident Market TechnologyThe markets in the FEAS region experiencefast and strong economic progress, and thesecurities markets are important enablers intheir development.DEVELOPING AN EFFICIENTSECURITIES MARKETThe markets within the Federation of Euro-Asia Stock Exchange Exchanges (FEAS) areexpanding fast and there is a strong drive torapidly develop the securities markets.It might be tempting to push for a fastdevelopment process and try to mirror keyfeatures of an exchange in a mature market.However, a mature market exchange modelmay be too advanced for an emerging marketstructure and by pushing ahead with thismodel there is a large risk of combining oldroutines and simple processes with a newadvanced market model. The exchange couldface problems utilizing the advancedfunctions and products, and it risks becomingout of synch with the rest of the market.A typical example of this could be setting up aderivatives market without adequate liquidityin the underlying market.OMX believes that it is possible to enable thesmooth development of emerging securitiesmarkets by focusing on a number of keyissues. It is of the utmost importance to beaware of and adapt to the developmentphases of the local market, and also take intoaccount the development of all stakeholdersin the securities value chain.Today, most of the FEAS memberorganizations have approximately ten years ofhistory as independent securities markets.The markets in this region experience fast andstrong economic progress, and the securitiesmarkets are important enablers in theirdevelopment. But still some securitiesmarkets have remaining issues which affecttheir efficiency. Some common issues are:• Low liquidity• Underdeveloped infrastructure andtransparency of the stock market• Low free float ratio and centralizedownership• Lack of diversification among investors• Regulation not aligned with the fastdevelopment of the financial market• Market infrastructure not corresponding tothe needs of the securities marketThere are many ways to approach theseissues. Some common questions are: Wheredo we start? How do we prioritize among allplanned and ongoing initiatives? What isimportant when?An easy way to answer many of thesequestions might be to choose an exchangewith a mature and well functioning securitiesmarket as a role model and try to learn fromits experiences. Such a model could provideguidance for advanced trading technology, apackage of strict rules and regulations,advanced products and instruments etc. Butthe result will in many cases be disappointingas the expected results may not materialize.The key insight is to understand thatimproving the liquidity in a market requires theentire transaction chain to work well together.Participants of the market, (members, issuers,etc…), as well as central bodies, (CentralBank, FSA etc...), and the marketplace itself,(exchange, CSD); all need to be aligned todevelop an efficient securities market.Another potential problem resulting from animmediate implementation of an advancedmodel is the different development phases ofan emerging market and a mature market.Most of the emerging markets are in the midstof an “awareness phase”, (see graph below),with the critical focus on educating retailinvestors and institutional investors on thesecurities market. The focus of the maturemarkets, however, is to grow the marketfurther and to expand cross-border activities,generating demand for more advancedsolutions.Maturity,VolumeStep EStep DStep CStep BPHASE 1 PHASE 2 PHASE 3 PHASE 4Established necessaryconditionsStep ACreate awarenessand investmentopportunitiesCreate criticalinvestor massGrow market andexpand cross -borderTimeFigure 1. The OMX definition of the fourdevelopment phases of a securities market.PAGE 14
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2007In conclusion, a fast implementation of anadvanced mature market exchange modelcan be harmful to the long term developmentof an emerging market as it may result ininefficiencies along the entire securities valuechain. Moving too fast could result in definingstrict rules and regulations that aremisinterpreted by the market and becomeimpossible to fulfil. Another example is thatthe exchange develops too advancedproducts that the market does notunderstand.Based on experience from working with ourown markets and consultancy assignmentswithin emerging markets, OMX recommendsthe following steps to enable the smoothdevelopment of emerging markets:• Understand which development phase yourmarket is in. Identify the bottlenecks and themost essential development steps for thisphase to improve market efficiency.• Learn from others. But adapt and simplifyexisting models and theories to fit the localmarket. Harmonize with internationalstandards where possible and explain the keymarket differences to international investors.• Clarify the roles and responsibilities of themarket stakeholders, understand the keydrivers, and address the entire value chain inthe development work.• Build transparency and trust to secure bothdomestic and international confidence in themarket.These recommendations increase theprobability of improving securities marketefficiency, and facilitate prioritization andaccomplishment of development initiatives.About OMXOMX is a leading expert in the exchangeindustry. Through the Nordic Exchange inCopenhagen, Stockholm, Helsinki, Iceland,Riga, Tallinn and Vilnius, OMX offers accessto approximately 80 percent of the Nordic andBaltic securities market. Our integratedtechnology solutions span the transactionchain enabling efficient securitiestransactions. With more than 60 customers inover 50 countries, OMX is the world’sforemost provider of marketplace solutions forexchanges, clearing organizations and centralsecurities depositories. OMX is a NordicLarge Cap company in the Financial sector onthe OMX Nordic Exchange. For moreinformation, please visit www.omxgroup.comNo. 1 in marketplace solutionsWidely known for our electronic tradingplatforms, OMX provides world leadingtechnology solutions across the transactionchain. Our systems and services aredesigned to help exchanges, clearingorganizations and central securitiesdepositories meet the extreme demands ofthe securities industry with efficiency andflexibility.OMX leverages its expertise to developsolutions that are in sync with today’s fastevolving financial markets and changingtechnology standards. We offer systems,systems support, operational services, andadvisory services that promote efficientsecurities transactions.Through advisory services OMX offersbusiness insight gathered by people in theexchange industry, delivered by people withinthe exchange industry. The advisory teambrings together:• Exchange and securities industryprofessionals• Industry technology experts• Management consulting professionalsOMX is working world-wide, advising clientsfrom the entire value chain. Projects are run inboth mature markets and emerging markets.CONTACT INFORMATIONContact Name Mr. Adam Kostyal E-mail adam.kostyal@omxgroup.com Website www.omxgroup.comPAGE 15
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