Erich Obersteiner:
By : Bogda Zukowska
The Vienna-based Newex Stock Exchange, a joint venture between the Frankfurt-based Deutsche Stock Exchange and Austria's Wiener Stock Exchange, was launched in November last year. Although first viewed as a threat by many exchanges in Central Europe, so far it has only attracted 10 companies with a total market capitalization of some 310.1 billion. Russian's Lukoil dominates the exchange with a 76.7% share, while other listed companies include Russian oil firms Sibneft and Tatneft, Slovakia's Slovakofarma and Austrian IT company S&T. Erich Obersteiner, a member of the Newex board since January 1999, previously worked for Austria's Raiffeisen Zentralbank where he was responsible for Central and Eastern European investment. He said bad timing and technical problems with the clearing and settlement system, Xetra, are to blame for the new exchange's poor reception. But he said that despite merger plans of the other large European exchanges, there is room for specialized exchanges such as Newex. The WBJ's Bogda Zukowska spoke with Obersteiner in Vienna. Below is an edited version of their conversation.
Q: Was Newex set up to challenge the other Central European stock exchanges in Warsaw, Prague and Budapest?
A: We never intended to challenge any of the local exchanges. If this is the perception, then it's wrong. The Newex was founded to provide capital to Central European companies from Western investors, not to interfere with Central European exchanges.
Q: Regional exchanges, including Warsaw's, were worried that major companies would prefer to float their shares on the Newex. This hasn't happened, and since its launch in November 2000 the exchange has attracted only 10 companies. Why has the Newex been so unsuccessful?
A: The Newex has not been as successful as we'd hoped and turnover is at the lower end. The reason is that when the Newex was launched investors were less inclined to focus on risky assets. Many clients investing in Central Europe had invested in new-economy stocks. When new-economy equities went down, investors' attitudes toward risky investments changed to risk aversion. When you compare turnover that Central and Eastern European securities generated in Germany in March last year the best month for turnover and November, it surged by 80%. It shows that at the time we launched the Newex, investment in Central Europe was heading down. Another problem is that the Newex is running on the Xetra clearing and settlement system and all members that want to have access to the system have to prepare for this, which implies additional investment. For some members it has been a deterrent to adjust their systems to trade Eastern European stocks. But I hope we've reached a critical mass of important market participants in Germany and Austria. In all areas, including financial settlement, we found room for improvement and put together a package of proposals to make the Newex more open for institutional investors and other professional market participants. At the end of the day, we all hope for the overall climate in the stock exchange to improve.
Q: So far you have focused on the technical side as a major reason why the Newex has not been performing well. But don't you think that international investors and public companies have not used Vienna for trading Central European equities because they prefer to use local markets that are already well established.
A: First of all, we've targeted retail clients, mainly in Germany. You can see that Central and Eastern European securities are traded in all major world stock markets, not only on local floors. It proves there's demand for a product such as a trading platform for Western investors interested in Central and Eastern European securities. So far, we've not managed to compete as an alternative, being able to combine the base and liquidity. Our aim was to start with a basic liquidity from the retail side using possibilities the Xetra network offers, but this low level was one of the reasons why no existing networks have succeeded creating a central trading place. It has been the second step we wanted to target. We are not that far yet, but steps we're discussing bring us closer to our target.
Q: Have you succeeded in attracting retail clients? What is the share of retail clients on the Newex ?
A: In terms of volume, institutional investors prevail. In the number of transactions, retail clients are in the lead.
Q: Why is it that the Newex, which has been promoting itself as a specialized exchange for high-tech firms, has so far only attracted old-economy companies?
A: We're trying to attract companies big enough to come into the focus of investors. But in the region there aren't many big, liquid public companies. I have just heard that investors are interested in only 10 companies from the region. So what we need for the Newex is to attract companies big enough to be interesting to Western investors.
Q: Why are there so few large companies in Central Europe?
A: Regional exchanges have so far been mainly used as privatization vehicles. They have not been engines for companies seeking to raise money for further growth from the public market. But Poland is a different case. There we've seen a number of initial public offerings (IPO) and capital increases that were not driven by privatization. Poland's capital market has been used as a source of new funds. For the rest of Central Europe, we've seen very few IPOs. For the medium term, we'd like to see the Newex as a platform for all kinds of companies, even smaller ones.
Q: Are you considering lowering the Newex's entrance criteria for companies representing the new economy as they're usually start-ups and don't have a proven track record? The Warsaw Stock Exchange successfully launched a scheme like this last year for IT companies.
A: So far we have not been thinking about adjusting our criteria for this group of companies. And we do not see any reason to ease the criteria, as they're referring mainly to accessing information. A certain level of profitability is not required, but a potential investor should be aware of a company's profitability and it requires high transparency standards. We offer, however, two quality segments for companies to be listed. Our criteria are determined by regulations to provide a transparent and secure market, so investors have the necessary information to make investment decisions.
Q: Recently you announced a bailout package for the Newex aimed at boosting trade and attracting new market players companies to be listed and investors. Has this package already taken some form?
A: We managed to cut penalty interest rates. We have increased the delivery time from T+2 to T+5, which gives more time for transaction settlements. Reducing the technical entry barriers is one of the key issues and the second one is to fine tune a market model. It means to be more open not only for liquidity providers vs. clients, but for others as well, especially for institutional investors and wholesale companies.
Q: When will this package be completed?
A: It is in its final stage, and will be announced soon.
Q: Are you considering an alliance with other exchanges or do you think that Newex can go it alone?
A: Europe has been struggling for mergers for years and years. And with the exception of Euronext, we haven't seen many successful deals so far. I don't really believe in one stock exchange for Europe. I have never seen competitive growth lead to a monopoly. One European market would suggest that all exchanges merge creating a monopoly. And monopolies have never managed to survive for long, except perhaps natural monopolies and monopolies backed by governments. Exchanges in particular are now moving Europe in line with the free market. I don't think this process will result in a monopoly. What I do think, however, is that we will see a consolidation in the industry. At the end of the process we will see a number of exchange cooperations. Within cooperation, its members would share trading systems and would share in the job of organizing different markets. And the Newex at the moment is something like this, as its two participants, the Deutsche Exchange and Vienna Exchange, share a trading system, and it is aimed at organizing a specific market of securities from Central and Eastern Europe. The Newex provides additional service for parent companies' customers. Similar schemes will not be uncommon in the capital markets' landscape we are going to see in the next couple of years.
