Trading up
By : Alexander Stocks
When 8 million employee shares of tele-giant Telekomunikacja Polska (TPSA) traded last Wednesday after a two-year lock-up period, brokers throughout Poland were hit by delays when placing their clients' orders.
Although Wednesday's expected volume of 50 million of 210 million TPSA shares never materialized, the pickup in trading was enough to keep brokers on tenterhooks sometimes for 30 seconds or so.
The scenario is nothing new for the Warsaw Stock Exchange (WSE). It happens every time a big-name stock debuts or turnover surges. The cumbersome system consisting of clients telephoning brokers and brokers having to import settlement data from WSE terminals to internal company computer systems can only process two orders per second.
Brokers have been desperate for a new system to replace it and finally it's about to happen on Nov. 17 the WSE is to get the long-awaited Warset IT framework.
Warset promises to connect the exchange to the brokers and their clients electronically and is capable of processing 40 orders every second. Its arrival has been the subject of endless gossip on the exchange floor and Warset has a lot to live up to.
"We are expecting that the system will improve the stock market's transparency," said Jacek Lichota, an investment manager with ING BSK Asset Management. "The system we're using for trading now is really outdated."
In with the new
Warset will introduce Poland's relatively young stock market to new vehicles for placing orders similar to those available on Western markets.
The overall benefits might be compared to trading in a bicycle for a Mercedes, a Warsaw broker recently said.
But first, everyone will be waiting to see how smoothly brokers and IT people pull off the transition to Warset from the outgoing AS 400 system. "We know that all of the biggest brokers are ready," said Piotr Kaminski, the WSE's administrative vice president.
To get a password for the system, brokers have been tested on the new rules and regulations as well as on practical application. During system tests and simulations, problems such as identical order numbers being given to different orders and parts of text not being translated from French into Polish have had to be fixed.
"Brokerage houses have had a lot of time to test (Warset)," said Piotr Maczewski, a broker with Amerbroker. He said that original plans to fire up Warset in early spring were pushed off until late June, then postponed until the end of September and again until Nov. 17. "It was very hard to test the system because the most important parts of the system kept changing," he said. "We just received the final version last week."
Kaminski said final versions were distributed on Oct. 27 to the 37 participating brokerages, adding that software readjustments are commonplace on all major exchanges.
Ready or not, here it comes
But a broker with a major Warsaw brokerage house who asked not to be identified said that even though his firm is officially saying it's ready for Warset, it isn't.
He said the software itself is still too flawed. "If Warset starts (on Nov. 17) we may see some very big losses," he said. "The system is not well prepared If we waited more than 10 years for a new system, why shouldn't we wait another couple of months?"
Another broker, Piotr Dudzinski of Citibrokerage, agreed that a few problems with the system still needed hammering out. "We hope everything will be checked and changed by the deadline," he said, adding that overall the system has been tested and seems to function well.
Citibrokerage, for its part, is technically ready to switch over to the new system, he said. Also reassuring, Dudzinski said, is that during the first three months of operation, aspects of Warset will be gradually introduced onto the exchange and the old system will remain on emergency standby as long as necessary.
Dudzinski said a recent mock session demonstrating Warset's capacity was encouraging. The several hundred orders processed per minute were a leap beyond the "five or 10 orders" per minute carried out by the current system. "It was incredible," he said.
Besides higher capacity, Warset also has the ability to tie brokerages into the same electronic framework, a "smarter" technology. In addition, clients should have eventual access to the same framework via the Internet.
The most significant feature of Warset, though, is its introduction of new kinds of orders to the WSE, including limit orders, stop orders, day orders and hidden orders (which allow market players to disguise large orders).
Trading will take place excluding an 8:30 a.m. opening call on a 10 a.m.-4:10 p.m. schedule, during which continuous trading will be available to smaller investors and not only those trading bulk shares. The market's 100 most-liquid stocks will no longer take part in morning fixing sessions.
Less liquid stocks will still see prices fixed in daily single price auctions with either one or two auctions. Block trades may also be executed between sessions over Warset.
Regional aspirations?
Most people agree that Warset, whose central servers will operate from the exchange's new high-tech complex on ulica Ksiazeca, is a welcome upgrade. It also increases the likelihood that an alliance with other exchanges could happen in the not-too-distant future to breathe new life into Poland's sluggish stock exchange.
Euronext, which owns NSC, the software behind Warset, was created through the September alliance of the Paris, Amsterdam and Brussels stock exchanges. Kaminski said integration or alliances with other markets are conceivable, but he declined to discuss details. WSE Chairman Wieslaw Rozlucki was recently quoted as saying that Poland is prepared from a technical standpoint to enter a wider European alliance of exchanges.
Bruno Rossignol, press spokesman for Euronext, said that NSC software is used on 20 exchanges worldwide but that doesn't signify any commitment to joining Euronext. He added that the Lisbon exchange had just announced its intention to join Euronext.
A financial journalist based in Budapest told the Business Journal that efforts made by the Budapest Stock Exchange to interest other Central European countries in some sort of alliance have been greeted by smiles only. The Vienna-based Newex exchange has been trading a handful of Central and Eastern European equities mostly from Russia since its inception several months ago.
But Warset's new $15 million computer system could make the 98% treasury-owned WSE more attractive to future investors.
"Our determination is to be privatized," Kaminski said. "The question is, how? That will be answered in the next two months, I think." For now, "it's probably too early to look at the (new) system and try to determine about mergers, integration and privatization," a Citibank analyst told the Business Journal. Also, even though Warset will open up new possibilities as far as international trading goes, Poland's securities law doesn't yet allow cross-border trading.
The WSE has come a long way since it was founded by the Treasury Ministry in 1991 as a joint-stock company with the Polish Securities and Stock Exchange Commission (KPWiG). Several years later, a system for continuous trading was implemented. Much of the system was originally based on a French model and the ties to that system are evident today. One indication of the WSE's importance in Central Europe lies in the Central European Share Index's (CESI) recent re-weighting of the index, a balance derived from the capitalization and turnover of five participating exchanges. BSE shares in the basket were reduced from 13 to five while WSE shares increased from 21 to 28, as reported in October by the WBJ's sister publication, the Budapest Business Journal. That left Poland with 47.6% of the CESI's total capitalization. The WSE is Central Europe's largest stock exchange with a market capitalization of approximately E34.5 billion.
