English
During the last 20+ years, exchange consolidation has been going strong, worldwide.
Exchanges, which used to be mostly mutual membership organizations have de-mutualized and privatized themselves. Once they became for-profit enterprises, exchanges have pursued shareholder value. Industry consolidation has been a major strategy for increasing the value of exchanges. The exchange business is characterized by variable revenues (which grow with increased transaction volumes) and semi-fixed costs, which delivers healthy profit margins. When exchanges merge, significant cost economies are usually realized by combining technology platforms and reducing staff. For the combined entity, profits increase, and the acquirer exchange thus becomes more valuable. Repeat mergers lead to increasingly valuable exchanges, as illustrated below.
After 20+ years of consolidation, the "exchange industry" has become a combination of:
Global exchanges such as NASDAQ-OM, Intercontinental Exchange (parent of NYSE), London Stock Exchange, Deutsche Boerse, Hong Kong Exchanges.
Regional exchanges, such as Euronext and SIX-BME in Western Europe
Giant national exchanges, such as Japan, Brazil's B3, Toronto Stock Exchange, Australian Stock Exchange, Singapore, Johannesburg Stock Exchange
Small national exchanges, e.g. Budapest, Bucharest, Zagreb, Ljubljana
In Central and Eastern Europe, there are two large national exchanges with regional ambitions - Vienna, Warsaw - and one other large player, Istanbul (with ambitions in the Middle East) and over a dozen relatively small or very small national stock exchanges.
What are the challenges and prospects for these small exchanges?
Challenges
Relative to global, regional or large national exchanges, small exchanges are disadvantaged. Their problem is being "sub-scale" - lack of scale economies in cost structure and insufficient scale to attract large investors.
The cost structure disadvantage is obvious: small exchanges cannot afford the massive technology investments needed to keep up with the state-of-the art.
More importantly, small exchanges have a tough time attracting the attention of large global and regional investors.
Large investors and their Assets-under-Management are concentrated in the countries that have long had funded pensions systems, professional management traditions and an "equity culture"
These large investors handle large amounts of investible funds. They invest in stocks with significant market capitalization and sufficient liquidity (so they can buy or sell without causing market impact).
In a smaller national economy and its stock market:
there are relatively few investment targets for large investors.
liquidity is also limited. Only the top stocks, usually included in the index, offer steady liquidity.
research coverage is limited
Prospects
How can small exchanges overcome these disadvantages?
Consolidation has been the standard answer.
In Northern Europe, for instance, the Swedish exchange OM consolidated several of the Scandinavian and the Baltic exchanges. Subsequently, it was taken over by NASDAQ to create a global exchange. All of the subsidiaries migrated to a common technology platform, with significant economies of scale in the cost structure. The NASDAQ brand is global and being NASDAQ-listed certainly helps any company.
Consolidation works, but the smaller partners usually wither, after the deal. Resources and talent migrate to the bigger exchange who is driving the consolidation process. Who ever heard of the Brussels financial center after Brussels Stock Exchange was acquired by Euronext?
The alternative is to build some type of coalition of smaller exchanges, which preserve the identity of the national markets.There have been two cases of such coalitions:
ASEAN Link: Malaysia, Singapore, Thailand, Vietnam, Indonesia, Philippines
Mercado Integrado Latino-Americano (MILA): Chile, Peru, Colombia and subsequently Mexico
Both coalitions included a number of key features
Creation of a common "asset class" ( Southeast Asian stocks, Andean/Latin American stocks)
Common web site: prices, analytics, broker research and Independent quantitative research
Family of indexes - regional/sectoral indexes for the region
ETF products - for the regions, with listings on major global markets (New York, London e.g.)
Common blue chip category
Common « road shows » and investment events
Remote memberships (brokers in one market may trade on the other markets)
Order routing network (to transmit orders from one market to another)
Shared technology (selectively)
Each country retains its own post-trade architecture: clearing houses, central securities depositories,
Each country has its own currency, regulatory and legal framework
In the case of ASEAN, each country has its own language ( English of course remains the lingua franca). In MILA, everybody speaks Spanish.
In both the ASEAN and the MILA case, there was some success in raising investor awareness of the region's stock markets. A "regional market" seems to begin emerging.
However, routing networks failed to achieve meaningful volume, because the post-trade cycle, clearing and settlement remains in the home market of the security being traded. An investor seeking to trade multiple markets in the region found it easier to deal with a major global broker and hold the securities at a major global custody bank, which is present in almost every post-trade national architecture
The regulatory and legal differences were further barriers.
Implications for Central and Eastern Europe
How could the Central and Eastern European exchanges cooperate? How could they become larger, more liquid, more attractive to the global investor?
There have already been attempts to consolidate exchanges in the region. Wiener Boerse, notably has tried to forge a Central and Eastern European Exchange Group, by taking equity stakes in the Prague Budapest, Ljubljana markets. Some of these equity stakes have been subsequently divested. There was an attempt to merge Wiener Borse and Warsaw Stock Exchange. So far, these consolidation attempts have not succeeded. They may happen again.
In the meantime, the Central and Eastern European exchanges should explore how they could become more attractive to global and regional investors and enhance their business.
There is a common "investment theme": most of the small countries in the region have reached, after 30 years, the end of post-Communist transition and have adopted a more "capitalist" model. The region offers a well-educated labor force, yet the cost of labor is still much below Western Europe. Unlike Western Europe, Eastern European countries are not burdened by expensive social overhead. Most of these countries have low levels of debt. The ingredients are there for the emergence of several Eastern European tigers. The region could be an attractive target for investors.
The Central and Eastern Europe region has its own characteristics
Multiple currencies (many tied to the Euro)
Multiple regulatory regimes, although in the EU member countries, there is some harmonization to EU practices
Different national post-trade architectures
Different languages, with English as lingua franca
The ASEAN Link and MILA experiences have shown that order routing networks are not successful as long as post trade architectures and regulation remain specific to national markets
It seems however possible to explore cooperation among Central and Eastern European exchanges, while respecting each country's identity and local financial centers. Based on the lessons from ASEAN Link and MILA, these exchanges could forge an alliance focused on realistic objectives - attracting global investors and encouraging the emergence of a regional market.
The May 27 , 2021 Ziarul Bursa conference demonstrated that Central and Eastern European Exchanges are seriously interested in cooperating. The Romanian Brokers' Association, led by Mr. Dan Paul has offered to organize a Working Group for this purpose. This is a very promising initiative.
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