When the Warsaw Stock
Exchange was brought back to life in 1991 after a break of 52
years, it began humbly. Turnover on the first day was
equivalent to $2,000. Just five stocks were listed and there
was one price fixing a week.
But the exchange was based on solid and relatively modern
underpinnings. Trading has been fully electronic from the
start, which 20 years ago was not yet the generally accepted
norm in developed markets.
Warsaw’s first derivatives contract –
futures on the blue chip Wig 20 Index – was launched
in 1998. That was the year when fully electronic Eurex (then
still called Deutsche Terminbörse) was battling it out
with the open outcry Liffe for dominance in Bund
WSE’s management itself admits that its focus over
the past decade has been on building up the cash market. The
exchange now has 400 companies listed on its main market and
185 on its alternative market. Now that it is generally
accepted that the stockmarket’s fundamentals are
in place, the spotlight is due to move to
There is much to be done in this area and it is where the most
exciting new opportunities are to be expected.
It is a good moment, therefore, to consider what the market
will look like five years from now. What opportunities will
there be and who will stand the best chance of benefiting from
Warsaw Stock Exchange’s often stated aim is to
become a premier exchange and a financial hub for the central
and eastern European region. This ambition is backed up by the
fact that with 38m citizens, Poland is the largest country in
the region and that the Polish economy is still on an unbroken
upward trend, despite recession elsewhere in Europe.
The exchange’s growth in derivatives up to now
has been held back by several factors: a protracted process to
privatise it, an antiquated trading system and a prohibition on
It is heartening that most of these issues have either just
been resolved or are set to be eliminated by 2012. The
exchange’s IPO was completed last year, and it
began trading as a listed company on November 9.
One of the peculiarities of the Polish market is the very high
share of trading by retail investors. In the main cash market,
private investors accounted for 27% of trading in
Polish financial institutions contributed 37%, and foreign
institutions 36%, two thirds of which came from the
The retail market share is even higher in derivatives
– 51% of volume in 2009, against 39% by Polish
institutions and 10% by foreign firms.
This has often been cited as the exchange’s
strength, but it may also be a barrier to its further
expansion. Retail investors lack the capital and expertise to
take the exchange to the next level, if it plans to compete not
only with Prague and Vienna, but also with Moscow and
Wanted: prop traders
What the WSE lacks among its members are proprietary trading
companies, even though regulations provide for this type of
Their absence makes it more difficult for the exchange to
launch new products and means that the markets in its existing
products are sometimes less efficient than they should
Trading on the world’s major exchanges is becoming
more and more competitive, due to the ever-increasing
penetration of ultra-fast black boxes. It is also becoming very
expensive to all participants, because of the arms race to
shave off more milliseconds from latency.
Proprietary trading firms from developed markets are therefore
always on the lookout for opportunities elsewhere, where
markets are even slightly less efficient, competition less
fierce and where they can take advantage of their accumulated
expertise. If the right conditions were created, many of these
firms would definitely be interested in expanding their
activities to Poland.
Breaking out of isolation
It is often observed by international experts that the Polish
financial market is rather isolated from the rest of
Polish pension funds and other fund management companies invest
almost all their assets within Poland. In part, it can be
explained by the fact that the Polish economy is large enough
to provide opportunities for all market participants, so they
are not forced to look for business elsewhere.
The privatisation programme pursued by every government since
the 1990s, in which the public eagerly participate, also keeps
banks and brokers busy.
WSE’s achievements so far have been impressive,
but it must not allow itself to become complacent now. To
become a truly regional exchange, WSE needs to come up with new
products which will be high quality, reasonably liquid and
attractive to investors looking for exposure not only to Polish
equities, but also to the wider region.
An exchange can rightly call itself an international or
regional hub only if its activity transcends national borders,
in terms of listings, membership and other
In summer 2010 WSE finally announced that it would buy the new
Universal Trading Platform engine from NYSE Euronext, and would
enter into a strategic partnership with this
Although no official date has been given, the new system is
expected to be rolled out in early 2012.
This will bring about a few important changes. At present, all
domestic members of the WSE use the white label GL Trade front
end, provided virtually free of charge by the exchange. Once
the new system is implemented, all the WSE’s
members will have to purchase front end licences from
independent software vendors, a major opportunity for the tech
Access to WSE will be available through Euronext’s
Secure Financial Transaction Infrastructure (SFTI) network.
This means all Euronext members worldwide will be able to get
access to WSE over their existing data lines, though they will
still need to complete the membership application
This will expose Polish institutions to competition from
well-capitalised firms with the latest technology and advanced
Two way traffic
It may also work the other way. Polish firms, too, will be able
to take advantage of the SFTI network. Access to Western
exchanges will become much cheaper for them, once they have
borne the initial hardware and software costs.
This will involve connecting to the WSE’s new
exchange engine through a third party application supplied by
one of the software vendors. Once that is done, the additional
cost to connect to another exchange will be much smaller than
it would be nowadays.
At the moment Polish financial specialists listen to stories
about the race to reduce latency by an extra millisecond or
two, colocating servers to be nearer exchanges and computers
cooled with liquid nitrogen as if they were science fiction
stories. WSE’s data lines are still limited to 512
kilobits per second.
Naturally, that too will gradually change with the adoption of
the UTP engine. Whoever is first to take advantage of higher
speeds by deploying the latest technology can expect rich
pickings in the Polish markets.
The migration to a new exchange system could be a game-changer.
A parallel can be drawn with what happened to the markets in
2002 when Trading Technologies first launched Autospreader, its
software that allows for automated quoting and trading of
multiple-legged inter-product and cross-exchange
At first the exchanges got clogged up with data, but eventually
bandwidth got expanded and the capacity increased. Both market
participants and the exchanges had to adapt.
The lasting consequence of this software is that markets became
much more interconnected and the margins on inter-contract
spreads became much thinner.
Winners and losers
Most revolutions produce winners and losers, and there is no
doubt that market participants in Poland will also have to
adapt to new realities or see their profit margins
In five years’ time, Polish financial markets will
be much more tightly integrated with those of western Europe,
and even more so if Poland adopts the euro currency.
New technology at the Warsaw Stock Exchange will shake things
up and expose the market widely to other firms in western
Europe which have been operating in an advanced environment
populated by black boxes and superfast quote machines for
years. Polish domestic players will be forced to raise their
At the same time, Polish brokers and banks will find it easier
and cheaper to conduct business abroad for the benefit of their
clients, or for their own accounts.
More technology-savvy members and new liquidity providers,
whether domestic or foreign, will allow WSE to further develop
its offering in the derivatives markets.
Trading volumes of existing products, such as Polish equity
options and single stock futures, should grow. Later, new
derivatives may be launched, like equity options based on
securities from other CEE countries and futures and options on
other asset classes such as natural resources and agricultural
If the WSE can handle the transition to its new trading system
adroitly, and take advantage of it to draw in new customers,
the needs of investors seeking exposure to the CEE region will
be much better served.
Marek Trepka is a senior consultant at Aequitas Associates, a
consultancy that helps exchanges build liquidity.
His areas of
expertise include exchanges, trading, technology and funds,
with a particular focus on central European