Quo Vadis WSE ?

Image :GPW

From one trading session a week to the biggest bourse in the CEE. During nearly 25 years of its existence, the Warsaw Stock Exchange has made paramount progress. But the next few years will be crucial for its future

by Jacek Ciesnowski

A rented-out room and computers, no phones and a bourse logo designed by the WSE CEO’s neighbor; such were the semi-guerilla conditions in which the first trading session of the Warsaw Stock Exchange took place in April 1991. For the first few years of its activity, the bourse trademark were the red suspenders worn by stock brokers who have seen the movie “Wall street” too many times.
The conditions were modest and so was the number of listed companies. Only five companies were being traded at the beginning (with clothing manufacturer Próchnik being the only one traded to this day). “We were looking for companies that were export-oriented and as such had some experience with the free-market economy. Except for Exbud, which was enthusiastic about being listed, firms were hesitant at first. The ones that did agree to debut on the Warsaw Stock Exchange, did so because they were forced to do it,” said Wiesław Rozłucki, WSE’s first and longest-running CEO (he helmed the bourse for 15 years).
Rozłucki himself convinced Minister of Economy Leszek Balcerowicz that Poland should reopen its stock exchange after over 50 years of inactivity. “It wasn’t difficult to persuade others to my idea. We were all enthusiastic about the transformation process and for many having our own stock exchange was the definitive signal that communism is over,” Rozłucki said.
The know-how came from the French bourse, which signed a cooperation agreement with Poland to help set-up the local stock exchange. “The idea was that we would start trading as soon as possible on a small scale, with simple solutions and in the next year, year and a half we would implement more modern solutions,” Rozłucki explained, adding that thanks to the initial simplicity of having one session per week with fixed listings, they could, along with Polish investors, learn the stock game as they went along. The WSE has came a long way since its inception. New indices, trading instruments and systems have been introduced throughout the years. Most have benefited the trading which has helped the bourse became the biggest stock exchange in CEE. Now, the question everyone asks is – what’s next?

Mateusz Gołąb/WBJ

Regional hub
For years, the CEE region has been dominated by two stock exchanges, the Warsaw Stock Exchange and the CEE Stock Exchange Group (including exchanges in Vienna, Prague, Ljubljana and Budapest). In the past, the Vienna-led group wanted to takeover the Warsaw bourse. But all incorporation attempts failed and the WSE has become a bigger stock exchange than all the exchanges within the CEE SEG (WSE capitalization in 2013 reached €132 billion, while the four exchanges in the CEE SEG had €129 billion capitalization). So it was no surprise that the group made another offer, but this time it would be Warsaw who would takeover Vienna. But that won’t be easy.
The concept of Warsaw being the regional hub has been talked about for years. In its strategy for 2014-2020, WSE boasts that its strategic goal is “to achieve, either independently, via strategic alliance or partnership-like cooperation with significant entities from the capital markets, a dominant role in the region and an important position on the European capital markets scene.” Of course, it’s easier said than done. “We should first see if such a transaction would be profitable for us. Such international mergers are very complicated and can have numerous unforeseen implications. Such a move has to be good for the stock exchange and for the whole economy,” said Rozłucki.
The complicated nature of the deal is something that worries former Treasury Minister and current partner at consultancy PwC Jacek Socha. “Warsaw and Vienna have completely different trading platforms and different services. Integrating them will come at a huge cost. Who will cover it?” he asks, pointing out that if the reason for the sale of CEE Group is because Vienna has its own problems that it can’t resolve, than Warsaw would be even less qualified to solve them.
One of the problems stopping the WSE from merging with or even taking over the CEE Stock Exchange Group is the Warsaw bourse ownership structure. While the State Treasury only owns 35 percent of the bourse, it has a majority of votes at the general meetings. The WSE was recently put on the “important to the national interest” list of companies, meaning that the Treasury won’t sell its shares in the company in the near future. “Every company, especially a listed one, should be open to all options, including selling that company at some point,” said Socha, pointing out that in his opinion, the WSE should be privately owned because treasury interests and investors’ interests are very often incongruous. “It’s highly unlikely that [the Treasury] would vote in favor of recapitalization of the company as it would dilute the shares they own. This hurts the Warsaw bourse as without additional capital expansion would be difficult,” Socha adds. The state-controlled stake and its special status is something that concerns Waldemar Markiewicz, CEO of DB Securities Poland and president of the Polish Chamber of Brokerage Houses. “From the perspective of the whole economy, the interests of one company are less important,” suggesting that the WSE should act like a public service company and have the investors’ best interests in mind first and foremost, as they are driving stock exchanges forward, pointing out that high transaction fees are what is stopping the WSE from growing. “Today, the Warsaw bourse is among the most expensive exchanges [for traders] in Europe and for stock brokers this is an important factor. When choosing an emerging market to invest in, they’d rather go to Istanbul where it is much cheaper to trade and explore more investment opportunities,” Markiewicz said.

300,000 investors
This point of view is not shared by Jacek Socha. “Some 300,000 investors bought WSE stock during its IPO. They invested their money in the company so they could profit from it. To let them earn their money, the bourse needs to increase its profits, control its expenses, etc.” explaining that for the WSE as a company, cutting fees might result in lowered income which won’t bode well for its investors.
The decision regarding a potential merger with Vienna should be known within the next few months, according to recently appointed WSE CEO Paweł Tamborski. “We have to include the matter of cost and income synergies when making our decision. I want the decisions regarding cooperation with Vienna to be known as soon as possible.” He added that “regardless of potential geographical expansion, we have to take care of our organic growth by improving liquidity and being open to new investors. Currently, we’re evaluating our strategy regarding this topic.”
Tamborski is only the fourth CEO in the exchange’s history. But his tenure might be the most important one as he will be making crucial decisions regarding the bourse’s future. “I’d like the WSE to be more market-friendly and to strengthen its position as a regional financial center. We want to create a good atmosphere surrounding the capital market in Poland. That’s why we will be actively pursuing new investors. We also want to undertake actions to make the market more attractive to issuers. Our main objective is to improve its liquidity,” he said.

Gielda Papierow Wartosciowych w Warszawie, Warszawa, ul. Ksiazeca 4, fot. Mateusz Golab

WSE Warsaw, ul. Ksiazeca 4, image: Mateusz Goląb/WBJ

If not Vienna than what?
Even though, according to many, the acquisition of Vienna is a must, naysayers have come to the fore. “The foreign investors that I’ve talked with are saying that Warsaw taking over the Vienna bourse won’t make Polish companies more accessible for them,” Markiewicz said. In his opinion, Warsaw shouldn’t proceed with international expansion and should remain local. “Poland is a market with huge potential coming from the investment needs of our economy. Even in the economic crisis Poland posted growth.” He thinks that the WSE should change its strategy in order to lower its costs, which is in the best interest of the Polish capital market.“The WSE should concentrate on introducing new products which would be accepted by investors and this has not been the case recently. It should also have a system which works, and the recently implemented UTP system should be the answer. Finally, the trading fees should be lowered, which would allow us [the stock brokers] to take full advantage of the new system.”
The new trading instruments, or lack there of, is a bone of contention between the WSE management and traders. The former bourse CEO Adam Maciejewski promised new products and instruments, but few were introduced and those that were did not satisfy brokerages. “The change of the WIG20 futures multiple to PLN 20 is the most controversial move,” said Mateusz Adamkiewicz, financial market analyst at HFT Brokers. “This change increases the minimal required deposit, which makes a difference for individual investors. On the other hand, the commission has not changed, which makes short-term investments more attractive for institutional investors,” Adamkiewicz added. In 2000, 85 percent of traders on the WIG20 futures were individual investors, while in 2013 that number dropped to 35 percent.
Newly appointed bourse CEO Paweł Tamborski, also promised to introduce new instruments, but for some this won’t change a thing. “New instruments will generate costs.  The question is if the bourse will make enough profit to justify their introduction,” said Socha, giving another potential scenario for the WSE’s future.

“If someone thinks that the stock exchange is a national treasure that can’t be sold, then they are wrong.

To others, like Rozłucki, a scenario involving the Treasury selling its shares in the WSE is simply impossible in Poland because of political reasons. “Even if such move would profit all sides involved in the transaction, it will never happen. No politician would allow it in Poland,” he explains, saying that the bourse has been a giant success story and selling it to someone else would be seen by many voters as unpatriotic. “If someone thinks that the stock exchange is a national treasure that can’t be sold, then they are wrong. All major stock exchanges in the world are privately owned, the only exceptions being Malta and Turkey. I don’t think the City of London would operate better if it was run by the state,” counters Socha, adding that many argued that since the banking sector in Poland was privatized, the stock exchange should remain national. But, as he explains, those sectors are completely separate from each other.

Less money, more problems
No matter where the bourse’s future lies, the WSE’s new boss faces tough challenges. The exchange, which for years has been boosted by money from the open pension funds (OFE) and IPOs of huge state-owned companies, has to look for new ways to expand its trading. According to equity fund manager at BPH TFI Jarosław Lis, the pension system reform could cause the value of funds with OFE investment to drop by PLN 30-40 million a month (from the PLN 1 billion figure observed before the reform). The extent of the damage will be known soon, based on how many Poles decided to stay in OFEs.
With all the biggest state-owned companies already listed, there are only a few left which could boost trading at the very least. Even the Polish airline LOT, still owned by the Treasury, will most likely be sold to a strategic investor rather than be floated. Others, like rail operator PKP and coal miner Kompania Węglowa have huge debts that need to be paid off before the Treasury will even consider listing them.
All these issues, as well as the macroeconomic situation, factor into the bourse’s recent lackluster performance. The total value of trading on the WSE in the first seven months of this year dropped by 4.4 percent year-on-year to PLN 122 billion. The bourse’s main index has increased by a mere 0.5 percent since the beginning of the year, which is a lackluster result compared to the S&P 500 which grew by 7.5 percent in the same time.

24-29_CoverGielda-5Looking east
The Warsaw Stock Exchange has ideas to bolster its activity. One of them was to attract Chinese companies which have had trouble being floated domestically. “It’s a matter of prestige for them. Being a publicly traded company brings trust and prestige. The Chinese public is very aware of IPOs,”said Benjamin Kroymann, partner at Squire Sanders, a law company which advised several Chinese companies in their European ventures. Chinese companies are looking towards Europe, because being listed in their own country is very difficult. “It’s a very lengthy and political process. Interest is so huge that smaller companies are not even considered for IPOs. Only state-owned companies [are accepted] and the biggest ones are lucky enough to be listed either in Shanghai or Hong Kong. The process can take two years and is very political. Some 800 companies are in the cue,” Kroymann added.
The first such IPO on the WSE was initially successful. Machinery manufacturer Peixin, entered the Polish bourse in October of last year and everyone hoped that they would pave the way for others. The exchange management even replaced a clock showing the current time in Tokyo for one with Beijing time.
Investors were even more excited when on the day of its floating, Peixin stock shot up by 30 percent. Very soon it all crumbled and nowadays its stock is hovering around the PLN 12 threshold (from the PLN 28 heights it recorded in October). Recently the company had to cancel its SPO, because of lack of interest from Polish investors.
The listing of the second Chinese company, car part manufacturer JJ Auto, was also a flop. The company wanted to sell 1.78 million shares, but managed to find buyers for only 100 thousand shares, a mere 1.24 percent of the company’s stock. The company had to file additional documents to be traded in Warsaw and its shares have dropped some 17 percent since its debut.
Adamkiewicz points out that Warsaw will never attract significant companies from Beijing. “Such companies will more likely choose Germany as both countries have far more significant economic connections than Poland. Our market doesn’t have sufficient capital to attract them and on the other hand, Asian companies have little presence here.” Kroymann agrees with that sentiment. “Companies, like e-commerce giant Alibaba will chose the New York or London stock exchanges because of their global position and reputation; others, especially state-controlled companies, will be listed domestically, but Poland can be attractive for Chinese SMEs,” he adds. His company is already working on another Chinese IPO on the Warsaw bourse. He lists a more proactive approach from the WSE in attracting Asian companies (Frankfurt bourse organizes seminars in China and even had its own road show there a few years ago) and finding local companies that are more involved in the Polish market as being the biggest factors for a successful Chinese IPO in Warsaw.

Broadening the horizon
The Warsaw bourse has also broadened the scope of its products. It started trading commodities which in the first seven months of this year brought PLN 20.3 million in revenue, a 65.2 percent increase y/y. It also acquired some 36 percent of shares in Aquis Exchange, a new “pan-European equities trading exchange.”
The Warsaw Stock Exchange has also launched a crowdfunding platform, Warsaw Startup Space, to help finance Warsaw start-ups together with the City of Warsaw and the Aula Polska business association. The project, besides the platform, includes a co-working space and help from advisors.

Mateusz Gołąb/WBJ

At the crossroads
Vienna or not, the next couple of years could be crucial for the WSE’s future.
According to Socha, CEE exchanges will undertake an “atomization process,” meaning they will grow to the size of their respective economies, just like it happened in some western countries.
“The Madrid stock exchange has some €900 billion capitalization and it is not considered a financial center at all. Its value only represents the size of the local economy.” He thinks that it will be hard to create a regional hub on its own, as previous attempts have failed. “Years ago, Vienna [along with German Deutsche Borse] tried to attract companies from the whole region by setting up a special stock exchange called NEWEX. This was a failure as no one was interested in an exchange which was not only small but also disconnected from any major financial markets.”
The former treasury minister thinks that the only way for a CEE exchange to become a regional hub is to find an established partner. “It will increase its growth dynamic, attract more investors and upgrade the market. It will be a part of a larger structure,” he said. “I can’t imagine a Russian company being listed on the WSE, but if the London bourse would have its CEE hub here, than all companies from the region that wanted to be floated in London would be listed in Warsaw, including Russian ones,” Socha said. The former treasury minister is somewhat optimistic in his views, as London had the chance to become WSE’s strategic partner back in 2010 before the bourse IPO, but did not show any interest at all.

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