BSE turns to foreign shares to boost turnover

With market turnover on a continuous decline and increasing state holdings in public firms, there are fresh attempts to breathe life into the Budapest Stock Exchange.  

One of these is a new service: the BSE launched trade in the shares of ten western European blue chips on a new alternative platform called BÉTa on November 15. The shares include BASF, BMW, Commerzbank, Deutsche Bank, E.ON, Nokia, Santander, Siemens, ThyssenKrupp and Total.

These stocks were picked because the issuers are well-known in Hungary, they generate significant turnover in their traditional markets and, in the case of European instruments, and trading hours are similar to those of the Budapest bourse. Erste Investment Zrt, the co-developer of the platform, aims to expand the number of instruments traded on the platform to 30 from January 2012.

Trading on the platform is conducted in Hungarian forints, thus the BÉTa market offers access to the equities of several European companies that are issued in a foreign currency without the need to face currency conversion costs. Exchange rates are constantly adjusted to market rates, but dividends are paid in euros.

Erste expects the alternative platform to generate a daily turnover of HUF 1 billion. The BSE said official market makers, who undertake to keep a continuous supply of bid and ask quotes in the order book, ensure liquidity of trading in foreign equities registered on the BÉTa. Market making helps investors find bid and ask quotes in foreign equities at all times, at adequate prices.

Trading hours and periods, trading rules, as well as order types and their expiry on the BÉTa are identical to those applied in the BSE’s equities section. Capital gains attained on the new market are subject to the same tax rates as those attained on BSE’s equity market.

An alternative channel

Most major Hungarian brokerages, with the exception of Concorde, have joined the new platform. Concorde points out that it has provided comfortable access to trading in foreign securities, in one way or another, for years. As this is not a revolutionary new service, “just another alternative channel” as they put it, market players do not foresee a considerable impact on the market.

KBC introduced its service to trade foreign shares directly online from clients’ existing accounts on July 1 this year, with 600 shares including those of the biggest US and European companies, and has since expanded the number of directly available products to 2,000. Clients can ask for whatever equity they want on the 15 foreign markets offered. As a member of the Warsaw Stock Exchange and the first Hungarian remote member of the Prague Stock Exchange, Equilor is able to provide direct access to the shares listed on those markets, the company said.

Delistings: Orco and Rába

Some new blood is sorely in need on the BSE; in addition to declining turnover, some issuers are set to leave or will likely be delisted, while overall free float is also decreasing as the state boosts its holdings in listed firms.

Orco Property applied to delist its shares from the Budapest bourse because of low trading volumes and to reduce listing and reporting costs. Orco shares will remain listed on the NYSE Euronext Paris, the Prague Stock Exchange and the Warsaw Stock Exchange. Given its multiple listings, Orco’s exit is not a big loss for the BSE, as 99% of trading usually takes place on the home market. Experts believe that multiple listings are therefore often pointless.

Market players have mixed opinions regarding the future of automotive firm Rába. Some believe that it will be delisted from the BSE in 2012, while others think that a responsible government would keep it on the stock exchange. The Hungarian National Asset Management Company (MNV) made a public purchase offer for Rába in November, saying the government wants to strengthen the state’s role in the automotive industry.

Other public companies are also seeing increases in state ownership. The government acquired a 21.2% stake in Hungarian oil and gas company MOL from state-owned Russian peer Surgutneftegas earlier this year. Added to a stake of around 2.4% it gained through absorbing private pension fund assets, the state-owned stake in MOL has thus increased to 23.6%. 

The Government Debt Management Agency’s (ÁKK) 6.13% stake in pharmaceutical producer Richter, together with the MNVs 25.2%, brings the state’s overall holding in the company to 31.33%. The share held by the government in Magyar Telekom also passed the 5% limit requiring an announcement, after the acquisition of the private pension fund assets.

Fortunately for the Budapest bourse there is a segment of companies with about HUF 5-15 billion annual net sales revenues that would be too small to list on a foreign market, but could arouse considerable interest in the Hungarian stock market. Good examples are building materials firm Masterplast, FuturAqua Mineral Water Production and Asset Management Company and IT firm Optisoft, which listed their shares on the BSE at the end of 2011.  

Bálint Szécsényi, CEO of Equilor Investment Ltd and new vice-chairman of the BSE

The BSE has been seeking alternative uses of its existing trading platform for years with failed attempts to trade in, for instance, gold or oil. The new platform has been launched in response to challenges by the expansion of MTF (Multilateral Trading Facility) platforms. Due to easier and cheaper trading, MTFs are the biggest competitors to organized exchanges.

Market players expect that the market maker will ensure liquidity in the new platform. However, the question is whether investors would prefer using the BÉTa online or through their brokers, as this service has been available at Equilor (and at most providers) for five to eight years. I would be happy to see the success of the new platform, because I hope that it will also have a positive impact on demand for the Hungarian shares registered on the BSE. 

Liquidity has dropped in most international exchanges during the past few years due to a decrease in risk appetite. However, the current major withdrawal from both retail and corporate financing by Hungarian banks gives an extraordinary opportunity for new bond and stock issues, such as the bond programs of energy suppler and trader Alteo and telco BTel, as well as the impending listing of Masterplast. The stock exchange is currently the only way for many businesses to raise funds. 

Szabolcs Takács, KBC Securities business development director

Our customers often ask for special instruments, such as the shares of small- and mid-cap North American firms. There is a demand for products that we would not even think about picking during the pre-selection process. One of the sexiest sectors, for instance, was that of Canadian gold mines.

BÉTa will not be able to meet such demand, as it can offer primarily continental European blue chips, thus excluding the biggest UK and US capital markets. Another disadvantage is that the bid-ask spread in home markets is only one-tenth of BÉTa’s spread of about 0.5% on average, so in many cases it can easily turn out that it is cheaper to trade on the home market of the given equity.

Nevertheless, we have joined the BÉTa platform. I think that it can help customers trading only in Hungarian instruments make the move onto trading in foreign equities in the real international home markets, too. 

It is the missing political support that is first of all accountable for the lack of real listings on the BSE. The government has lately made the stock exchange out to be something like a casino to be held in contempt. Treating the stock exchange, the hotbed of self-provision, like that could easily backfire, especially in the current demographic situation. I hope that the government will realize that the capital market is not to be witch-hunted. 

Another factor to blame for the weak capital market is that Hungarian entrepreneurs are not comfortable with the transparency required by a public company. I suppose that Hungarians were not born corrupt, but the tax system has greatly contributed to making them just that. 

Márton Radnai, CEO of financial software provider Ramasoft, the operator of investment portal netfolio.hu

The introduction of the BÉTa market is a good idea, but it will not solve the fundamental problems of the BSE. Given the huge costs of setting up the new platform, I was really surprised that Erste decided to launch it. 

The preference for home markets is still strong in Hungary. According to our experience, there is no considerable interest in foreign shares from clients, with only a handful opening accounts suitable for trading in foreign equities, such as Erste Trader and Equilor Trader accounts. One of the main problems is that clients do not have easy access to information about foreign shares. While OTP, MOL and Richter dominate financial news in the Hungarian media, potential investors know next to nothing about Commerzbank.

Another issue is that it will always be cheaper to buy and sell foreign equities in their home markets. Fortunately, Hungarian investors face no administrative barriers at foreign exchanges. 

I foresee a breakthrough in the consolidation of the stock exchanges in the CEE in 2012, as the Vienna Stock Exchange is already fed up with the operetta with the BSE. This is reflected in recent changes in the BSE’s board. (The BSE board appointed Michael Bühl, CEO of the Wiener Börse as its chairman and elected Petr Koblic, chairman-CEO of the Prague Stock Exchange to the board of directors.)