Central and eastern Europe’s
derivative markets are patchy. With liquidity scarce, it makes
sense to pool it. Warsaw Stock Exchange thinks it should be the
hub – but Wiener Börse has acquired three CEE
exchanges and wants to unify their markets. Which market has
the most credible claim to be the regional champion?
Mareen Goebel reports.
Central and eastern Europe was one of the most exciting
investment themes of the past decade. Exposure to the region
was a guaranteed way for companies – including
financial firms – to make equity analysts upgrade
Since 2008, the euphoria has crashed to earth. Banks with
large east European loan books have been punished in the
stockmarket, and countries including Hungary, Ukraine and
Latvia have veered perilously close to financial
The one economy that has been able to keep holding its head
high is Poland. Now the Polish financial markets’
success has been crowned by another event, long looked forward
to by some participants. On November 9 the Warsaw Stock
Exchange's shares began trading after a Z1.2bn ($420m) IPO
that was 25 times oversubscribed. The sale reduced the
government's stake from 98% to 35%.
Blocked out by the noise coming from Poland, another initiative
has gone if not invisible, then certainly underreported. Wiener
Börse, Austria’s stock exchange, is behind
what looks like at first glance one of the most ambitious
projects in CEE financial markets.
The region’s fragmentation, with many small
national exchanges, divides the already scarce liquidity up
even further, a radically different pattern from the
consolidated – at least in derivatives – west
European landscape dominated by London and Frankfurt.
What many in the region are asking is whether one regional
exchange champion will emerge, and if so, where and under what
Liquidity puddles, not pools
The core problems for CEE exchanges are their lack of liquidity
and international profile. "Generally speaking, there are only
futures markets in Poland and Turkey with regards to the CEE
region," explains Manfred Sibrawa, head of eastern European
equities at Austrian bank Bawag PSK. "Poland, Turkey and Russia
are highly liquid markets, but not much happens outside those
hotspots. In all other markets, there is not enough liquidity
to speak of markets at all. The main problem is that the
spreads are very wide and the market making system
isn’t really established."
Bawag’s activities in CEE are focused on portfolio
investment, purely in equities. Sibrawa adds: "We could also do
derivatives, convertibles etc, but as there is a lack of
products so far we only use equities. Our main markets are
Poland, Hungary, the Czech Republic, Russia and
The shallowness of these market is another serious problem.
"The Hungarian index consists of three to four titles," Sibrawa
points out. "The market making system is partially established.
In Hungary, the market is simply not deep enough. You can
influence the market, and even control the small and mid caps
with a few million euros to invest, which isn’t
attractive for large institutional investors that we
Austria: has the gateway to the East
It’s one of the most well-worn clichés
about Austria, but Vienna has served for a long time as the
'gateway to the east’, and financial firms there
keep touting this as one of their unique selling points.
In this tradition – and supported in no small part
by the existing CEE networks of the Austrian banks, whose
growth has been fuelled by their rapid expansion in the region
– Wiener Börse acquired three neighbouring stock
exchanges in short order.
It bought a first stake in the Budapest Stock Exchange in
May 2004 and subsequently expanded to a majority holding. In
2008, Wiener Börse acquired Ljubljana Stock Exchange and
the Prague Stock Exchange.
Then in January 2010 the four were turned into subsidiaries
of the holding company CEE Stock Exchange Group, which is
dominated by Vienna.
The combined market capitalisation of companies listed
on the four bourses reached €137.5bn in July 2010. While
this accounts for around half of the whole market cap of the
CEE region, Vienna has the lion’s share with just
Especially from a derivatives perspective, Wiener
Börse’s creation of the CEE Stock Exchange
Group has gone a long way to consolidate the landscape in
eastern Europe. Of the four exchanges combined under the
umbrella, all but Ljubljana offer derivatives.
Along with the acquisitions, Wiener Börse has been
integrating the data feeds from Budapest, Ljubljana and Prague
into its own data feed. In September 2009, Vienna launched the
CEESEG Traded Index (CEETX) of the 25 most actively traded
shares across its markets, and the CEESEG Composite Index,
which includes all the stocks in each market’s
All four exchanges are hoping now for dividends from the
merger – they want more liquidity, more strength, and
a higher international profile for the individual exchanges and
the CEE market they represent.
"The aim is to be a better competitor and to establish
the biggest stock exchange group in CEE," says Jiri Kovarik,
director of external communication at the Prague Stock
So far, however, Wiener Börse doesn’t
appear to have done a lot with its new acquisitions.
The timing of the mergers was not exactly auspicious. The
supporting foundation of the Austrian banks’
network has crumpled under the pressure of the credit
Prague: hoping for the best
Prague Stock Exchange introduced futures in September 2006,
but the products have not really taken off. They include
futures on single stocks and the PX Index, which comprises 14
stocks from the main market.
"Trading is not very active. While domestic investors seem
to understand them, they still shun them and prefer to hedge
risk by short selling and leveraged trading. Generally, the
market isn’t used to derivatives," says
What trading is done in Prague is by domestic institutions.
PSE wants to increase activity through marketing measures and
education, but concedes that "liquidity at the PSE is not deep
enough" and that "domestic investors which we target know about
the products and what they can bring, but they are simply too
conservative to use them."
Against this backdrop of shallow liquidity, the exchange
"doesn’t foresee any further product development
in derivatives in the near term".
PSE has a fair amount of hope that the Wiener Börse
takeover might reverse its fortunes. "We believe there will be
substantial changes," says Kovarik. "We are working on
implementing Wiener Börse’s trading platform
Xetra. It will be deployed across all the CEE exchanges that
Wiener Börse owns, which will give their members access to
our markets and vice versa."
Since 1998 PSE has been using its in-house developed trading
system Spad, and the switch to Xetra means a lot of extra
"The aim is to keep the advantages of the Spad system and
customise the Xetra modules so they offer the same advantages
that Spad did," Kovarik explains.
Asked when the technological switch was due to happen,
Kovarik said: "Introduction of Xetra has no fixed date, but
we’re working on it and expect it to go live at
the end of 2011/beginning of 2012. At the moment, we are
talking to our members about how the switch-over will affect
Additional work is happening on the legal side. While all
exchanges are regulated under Mifid and the European Union
provides the regulatory framework, "each country’s
legal systems are different and each exchange has a different
set of rules and regulations to follow," says Kovarik.
What else can the CEE Stock Exchange Group offer?
"Cross-membership between all the markets," Kovarik says,
"will be a key advantage for our members and the members of the
other participating stock exchanges."
Budapest – ready for liquidity
The Budapest Stock Exchange’s story has much in
common with Prague’s. It launched index futures
and some currency futures in 1995. In 1998, single stock
So far, BSE offers a full range of equity options and futures
and currency futures. The most popular, accounting for around
30% of trading, is the Bux Index Future. Another third comes in
single stock futures, while 40% is FX futures. But, again,
options, while available, simply haven’t taken
"All markets in the region suffer from similar problems,"
explains Attila Tóth, deputy CEO of BSE. "What activity
there is comes from domestic retail investors. At the moment,
foreign investors are simply not interested in the market, so
right now the scope for derivatives in the market is fairly
Foreigners, Tóth says, are giving BSE a wide berth
because there are not enough domestic institutional investors
to give the markets the depth they seek. Therefore, he admits,
"Activity is mostly driven by speculative retail investors who
use futures because of the leverage they provide."
Asked what the BSE expected to gain from the CEESEG project,
Tóth said that he hoped that in a few years, all its
products would be available on a single platform, allowing all
members of all the exchanges to access them. "We are sure that
the CEE Exchange Group project will help us reach economics of
scale. But we’re also aware that
there’s a lot of work to do on our domestic retail
base," he says.
Despite its current shortage of liquidity, Tóth is
ambitious about BSE’s future reach.
"We’re not only aiming at the exchange members in
the CEE region, though, or to bring members of the Wiener
Börse to Budapest. We have a much larger scope, which
includes all the European investor community."
Technical upgrades are on the cards here, too. At the moment,
the exchange runs its own system, MMTS (Multi-Market Trading
System), which was created by an Australian company and has
been developed in-house. Switching to a shared platform is a
matter of necessity for BSE. "Since this system is not is not
used in the more developed part of Europe, connecting to us is
also a matter of cost and effort for new investors,"
Asked when the shared technology platform would be introduced,
he said: "We’re talking about running Xetra for
the cash markets and Eurex for the derivatives market at a
later stage, but there is no board decision made yet on the
timing of the implementation."
CEE Exchange Group – competition for
Opinions diverge on whether CEE Stock Exchange Group, marketed
as "the largest player in CEE" in numerous press releases,
poses a challenge to the Warsaw Stock Exchange, which, on its
own, is the biggest derivatives market in the region and has
long eclipsed Vienna.
CEESEG’s party line is that "the primary objective
is to strengthen, advance and internally position the capital
markets of our member exchanges in CEE", while the medium to
long term goal is to "raise liquidity at all stock exchanges of
But so far, not a great deal appears to have happened. The
software unification has not been implemented yet, market
liquidity remains low (derivatives trading dropped by 15% on
BSE in 2009 after a similar fall in 2008, though it has
recovered about 3% so far this year), and tangible results are
Asked why CEESEG seems to be moving so slowly, while Warsaw is
bounding ahead (volume up 54% so far this year), some players
in the market suggest that when Vienna acquired the other
exchanges, it "overpaid significantly on even the bullish
evaluations of the boom years". One source calls the valuations
of the acquired exchanges "political".
Wiener Börse responds: "We have paid a strategic price
that was in accordance with the market value at that
Asked what the mergers had actually achieved for its acquired
exchanges, Wiener Börse replies: "Our partner exchanges
are included in our road show programme to increase their
issuers’ international visibility before
international institutional investors. Also, the data of our
partner exchanges is distributed via our data feed and thereby
received by more than 200 data vendors who further distribute
them. In addition, we are cooperating in the index area. These
measures are all drawing international attention to our four
exchanges. To make market access easier, we are currently
implementing a common trading platform, starting with the
Ljubljana Stock Exchange. Budapest and Prague are to follow in
But asked whether the group had actually agreed to adopt Xetra
and Eurex for all its exchanges, the bourse is elusive: "The
implementation of a common trading platform is a common goal of
all CEESEG stock exchanges."
So, is the CEESEG project a challenge for Warsaw?
Budapest is being diplomatic. "The CEE Exchange Group project
for us is not a matter of challenging Warsaw, so much as trying
to reach a better level for all of us than we had before, in
terms of liquidity and international profile and exposure,"
says Tóth. "There is a lot of room to develop our
individual domestic markets, so it’s less a matter
of rivalry with Warsaw than improving and developing the
individual countries and the CEE region as a whole as financial
Asked if there was any prospect of cooperation between Warsaw
and Vienna, Ludwik
Sobolewski, CEO and president of the Warsaw Stock
Exchange, says: "I did talk
to my colleagues at the Vienna Stock Exchange and some
cooperation would make sense, but so far it’s all
talk and no deeds."
Is Warsaw a competitor or a potential partner in the project to
develop the CEE markets further?
Wiener Börse replies: "We do not see the Warsaw Stock
Exchange as a competitor and we are interested in cooperating
with the exchange. However, we are not holding specific
negotiations at the moment."
Asked what he thought of the CEE Stock Exchange initiative,
Douglass Welch (pictured), d
irector of emerging and western European equity derivatives at
UniCredit in London, says: "
Vienna clearly wishes to innovate, which is a good thing. But
all those four markets have drawn very little new speculative
interest so far, so we don’t see huge leaps in
liquidity once the project gets off the ground."
In his view, CEESEG might do best to liberalise, allowing
smaller block-crosses and third party give-ups in derivatives,
to attract smaller investors.
"Poland also suffers from this lack of flexibility," Welch
says. "The key to the CEE’s success will be to
attract more domestic participants through the pooling of
liquidity. Then more speculative liquidity would be attracted.
The core product mix is adequate given our near term
expectation of demand. There are ways to attract more retail
customers, simply consider the success of listing ETFs in
Vienna. As much as I’d like to see a huge uptick
in activity, for the short term I just don’t see
the international risk appetite required."
Warsaw is dismissive. "The CEESEG is a linguistic thing, as all
the markets [within CEESEG] are still completely separate,"
Asked if he saw the CEE Stock Exchange project taking off, one
market participant says: "I’m quite sceptical
about what value Wiener Börse can bring. Budapest
hasn’t developed since Wiener Börse acquired
it. Some market rumours suggest that players in Hungary are so
unhappy with the Budapest Stock Exchange post-acquisition that
they may start their own exchange."
Asked for its view on these rumours, Wiener Börse
responds: "In our view, the cooperation with our partner
exchanges is very fruitful and strengthens the region as well
as the local markets."
Some investors seem to have decided which of the CEE champions
"We’re very interested and involved in the
developments in Warsaw," says Welch. "For fundamental
investors, Warsaw has a robust economy yielding good corporate
dividend streams. Wig Index products and stock futures are
certainly on investors’ radar, and there is quite
a bit of opportunity for index arbitrage. The Polish story has
attracted substantial interest from abroad. Poland is one of
our top picks in the emerging European markets."
adds that derivative i
nterest in the other CEE markets, such as Hungary and the Czech
Republic, is more OTC, liquidity-driven and focused on stocks
with the deepest liquidity.
Apart from being buoyed by the compelling 'Polish
story’, which attracts foreigner investors, Warsaw
has other strengths.
"Warsaw certainly enjoys the first mover advantage," in
Welch’s view. "They have an active domestic user
base – strong pension funds, which create consistent
demand for all those IPOs of government companies about to
happen on the WSE. Compared with ATX, CTX or the Bux, there are
more users of Wig derivatives. However, the focus has been on
futures rather than options, which are not yet as
Wiener Börse, he says, "has a good diversified investor
community, even if there’s a little bit of
frustration over liquidity. There are a few large institutional
players such as banks and insurers making use of hedging tools,
but the retail sector is more ETF-focused."
Already the most visible CEE exchange overseas,
Warsaw’s IPO record has drawn notice, with the
IPOs of insurer PZU and electricity company Tauron attracting
attention earlier this year.
WSE’s own IPO is one of many privatisations lined
up to feed the capital markets with investment
As has often been said, Poland has taken to free capital
markets since the end of Communism like a duck to water.
Compared with some of its neighbours, it was also much slower
to sell off its blue chip companies to foreign
Market participants cite the country’s large
population, strong economy, domestic demand, and financial
community as strengths of its derivatives market. Poland, some
believe, has reached a depth and sophistication that give the
market critical mass to continue on its growth path.
One begins to wonder if Vienna’s and
Budapest’s claim that Warsaw is not their
competitor may be due to the fact that Warsaw has already
"In terms of liquidity of the underlying, Warsaw has the lead,"
says Welch. "Any development in accessibility, such as
give-ups, will certainly be beneficial to trading growth. The
Polish regulatory environment for derivative usage is evolving
but remains more conservative than Poland’s
western neighbours. But if you look at turnover and open
interest, Warsaw is head and shoulders above Austria, Hungary
and the Czech Republic, and I don’t see this
changing any time soon."
Ambition to be a 'good
The pattern could change in CEE. But on present showing, the
CEE Stock Exchange Group remains an umbrella covering four very
limited, mostly domestic exchanges with little further reach
than their shallow domestic liquidity pools.
To the north is the larger and more vigorous Warsaw exchange,
which also has ambitions beyond its own borders.
"I don’t think of Warsaw as a national exchange,"
"It’s doesn’t adequately reflect the
nature of our business, which is not contained within our
national borders. The very term sounds archaic when applied to
Warsaw, but there are certainly purely national exchanges in
the CEE region."
In fact, when it seemed that the IPO markets would remain
closed, Warsaw was in talks with Deutsche Börse over a
trade sale last year, but only under the condition that its
strategic vision would remain intact. The Germans declined
– the deal fell through.
Far from being just a Polish champion, Warsaw sees itself as
the emerging heavyweight that will sweep up everything between
Frankfurt and Moscow.
"Our strategic scope is much wider than just CEE," insists
Sobolewski (pictured). "We are also looking at the Ukraine and
Belarus, which are two of our most important regions. All of
the regions we are looking at have inefficient capital markets,
and we are aiming to offer everything that’s
interesting in the whole region under one roof –
Wig 20 Index Future, which a market participant calls "a good
product", is the fourth most actively traded equity index
future in Europe. The exchange says it has the broadest product
range in CEE, and that it sees many advantages of having all
markets such as equities, bonds and derivatives under one
Next steps include a systems upgrade backed by its technical
partner NYSE Liffe. Then the exchange plans to tackle the
Rather than cooperating with other exchanges in the region,
Warsaw’s strategy is to approach CEE companies and
persuade them to list in Warsaw.
So far, 23
foreign companies are listed on the WSE’s Main
Market and three on NewConnect, two of which are from the Czech
Republic, and one from Bulgaria.
"Our aim is for NewConnect to be the 'go-to’
exchange in CEE for all CEE companies and entrepreneurs seeking
to list their companies," says Sobolewski.
The strategy of outflanking foreign exchanges and taking their
business doesn’t seem to allow for much
cooperation between CEESEG and Warsaw. "Frankly, the more
Warsaw succeeds in their vision, the less chances the CEESEG
project has for success," says one source.
And Warsaw doesn’t raise any objections to this
analysis. In Sobolewski’s view: "Good monopolies
are, for lack of a better word, good."