SEE Link was officially launched at the end of March 2016, and is growing rapidly in terms of its member exchanges. The shared platform, which was originally set up by the stock exchanges in Zagreb, Sofia and Skopje, aims to rationalise and connect the relatively small capital markets of south-eastern Europe. It now has four new members that applied and will be connected to the platform this year: Ljubljana, Belgrade, Montenegro and Banja Luka. In addition the Athens Stock Exchange has recently submitted membership application and Bucharest intends to do so later this year.
The platform is a “win-win situation” for Ivan Steriev, CEO of the stock exchange in Skopje, where the company that operates SEE Link is based. “Since SEE Link was mainly financed by a grant from the European Bank for Reconstruction and Development (EBRD) and with only a small amount of capital from the three exchanges, the EBRD shoulders the risk,” he says.
That means the venture is also guaranteed. In 2014, the EBRD supported the initial phase of the SEE Link project, to introduce an electronic system for order-routing, with a €540,000 grant. This was with the intention of strengthening local capital markets and encouraging the use of local currencies, and also to lessen dependence on external sources of financing and to strengthen local growth. Now, the bank provides advice and makes sure the platform is fully operational.
“It has been tested and it works, now. It offers easy and cost-efficient access to a bigger market and a larger liquidity pool and now it is becoming too big to ignore,” says André Küüsvek, Director of Local Currency and Capital Markets Development at the EBRD.
Ludwik Sobolewski, CEO of the Bucharest Stock Exchange, told Emerging Europe that SEE Link is a very good example of the ‘productivity’ of involving supra-national institutions, such as the EBRD, and of the market operators alike. That goes beyond the engagement of national governments, which is usually very passive when it comes to modernisation and developing the local, under-realised capital markets. This is despite the fact that governments benefit enormously, politically, if there is progress in that domain.
In need of a local push
“It is very often the fault of the national governments that — remarkably, in the ‘frontier’ countries — have such low awareness, knowledge and expertise about the impact of capital markets on prosperity, financial literacy, innovation, building up of intellectual capital and entrepreneurship,” he added.
In a video interview with Emerging Europe, EBRD’s Mr Küüsvek said Poland was a good example of how domestic triggers have helped the capital market grow. “When [the government] started pension reform, it basically created a growing institutional investor based in the country (…) and very quickly became attractive to foreign issuers.” He has also seen positive developments happening in Romania over the last few years.
Ivan Takev, CEO of the Bulgarian Stock Exchange, is aware that individual markets in the region are not attractive, from a foreign investor’s perspective, because the trading volumes are very low. The free float is also low, so in order to make it more ‘investment attractive’, the stock exchange needs to grow organically from the inside.
“Over the years we have approached investors, numerous times and they have always asked us the same question: ‘how can you expect me to invest in your market, when you are not investing on your own market yourselves?’ So we need to gather a critical mass, in order to become investable from abroad. We need to make things a bit more straightforward and to grow, in order to see more international order flow,” Mr Takev says.
“There are many similarities between the countries of the Western Balkans, but in commercial terms the mutual ties are weak,” says Bucharest’s Mr Sobolewski.
“These capital markets are very small, and it is unlikely that there will be an intensive flow of orders and/or transactions between them, irrespective of their technological competences. Having said that, the SEE Link project is an interesting endeavour — the first, after the quasi-collapse of the project to integrate the markets of the CEE region, which has dominate the market until now, and which was led past by the Wiener Börse [Vienna Stock Exchange]. The SEE Link project proposes a completely different approach to the consolidation of small markets, than that offered by the one that failed last year,” he adds.
An innovative solution
SEE Link is an attempt to solve a problem that has troubled the region for decades. The capital markets are simply too small, and too isolated from one another. So are the potential benefits. That is too much trouble to go to, to learn all the (new) legal requirements for each market. By harmonising the regulations between the three markets, through SEE Link, the three participating stock exchanges hope to make their markets easier to access and more appealing to these investors.
“Now, with SEE Link there is an order routing system in the background and brokers have a front end of the system to enter orders in. Every brokerage house that is a SEE Link member has an inter-broker agreement with its counterpart in the market that they want to trade with. Both exchanges and brokers connect through this protocol. There is also a gate through which brokerages can give orders without any need to use fix to make any investment into their brokerage applications,” says Ivana Gažić, President of the Management Board at the Zagreb Stock Exchange and SEE Link steering committee member, as well as President of its Supervisory Board.
At the end of April 2016, the combined equity market capitalisation of the three founding stock exchanges — Skopje, Sofia and Zagreb — amounted to €21 billion and allowed order routing of 387 stocks. The addition of Banja Luka, Belgrade, Ljubljana and Podgorica increased the capitalisation by €11 billion. It is estimated that once Athens and Bucharest join, the figures will grow by €46.3 billion and €29.1 respectively.
Sofia’s Mr Takev expects SEE Link to change foreign investor attitudes towards capital markets in the Western Balkans. While navigating between the three separate markets can be difficult and uneconomical from the foreign investor’s point of view, at present, SEE Link intends to change this situation.
“Now, brokers with international clients will have everything on one screen. So even if they are not initially interested, they will see after a few hours, a few days, that some Croatian or Macedonian company is going up in price and this will attract their attention. With the platform they will have one route to the whole region. We hope that this will facilitate order flow and that visibility will be higher and complexity lower,” adds Mr Steriev.
Dr Nikolaos Porfyris, Deputy Chief Operating Officer at Athex Group, believes that regional co-operation, through an efficient cross-border link, can strengthen interest in local stocks. The crucial parameter is to increase the visibility of the stocks of each participating market. Marketing is needed to increase visibility and can be realised through presentations of the listed companies, making research available, increasing free float and efficient post trading links.
“Activities such as the diffusion of foreign investment interest into a larger geographical area can provide critical liquidity to all the participating markets. This can be achieved through the “re-use” of local infrastructure of exchanges, clearing houses and CSDs without the need for extensive investments in new trading and post-trading systems with questionable cost recovery,” says Dr. Porfyris.
“Rather than increasing intra-alliance flows, SEE Link has a chance to attract orders from outside of the sub-region. In fact, it will realise the old idea, of a “single-entry” point to a number of markets, which is apparently what some international investors would like. The scale of this concentration, or the aggregated value of the investable assets behind it, will remain small, but it is a step forward in making them altogether more appealing to investors and intermediaries,” says Mr Sobolewski.
Siniša Krneta, CEO of the Belgrade Stock Exchange, believes SEE Link is an opportunity for the Belgrade stock exchange, just as for the other members and applicants, not only to broaden investor base present in Serbian capital market but also to boost incentives towards the private sector.
“It will dramatically shift our fundamental manner of financing growth and development through debts and through banking loans. This broadened base will actually be an additional card in our hands, to persuade private companies to plan growth through the capital market’s equity raising, says Mr Krneta.
“We hope to make capital markets more attractive places for corporates to raise funding, either by issuing bonds or by raising equity. This is because it became evident, during the global crisis, that more equity finance and more diverse sources of funding are needed to support corporates,” Vedrana Jelušić Kašić, EBRD Director for Croatia, said in a video interview with Emerging Europe.
In April 2016, the joint turnover of the founding stock exchanges amounted to €44 million. The joint turnovers in Banja Luka, Ljubljana, Podgorica and Belgrade exceeded €102 million. The Athens Stock Exchange turned over €1.2 billion and Bucharest, €273 million.
A win-win situation
“Whether it will be 10 per cent or 25 per cent, I cannot speculate, but each percentage point of increase is a success,” Skopje’s Mr. Steriev says.
“[SEE Link] creates a triple win: for local members, as they enhance their range of products and sales; for the exchange, as it expands its services offering and for the markets to which the outbound trades are channelled, as their liquidity is increased. Therefore, SEE Link, which represents a joint effort to create a regional cross-border network, is an extremely interesting step that further strengthens regional co-operation,” Dr Porfyris told Emerging Europe.
Two months after SEE Link became operational, SEE LinX and SEE LinX EWI were launched and a total of 27 investment companies (brokerage houses) are eligible to trade via SEE Link.
Zagreb’s Ms Gažić says she is very pleased with the overall development of the project. “The interest to join SEE Link, from new exchanges and brokers, is continually growing and we are looking forward to welcoming more new participants in the future. SEE Link is very cost-effective and as it will provide assistance to members without any charge for two years, we hope to attract sufficient number of brokers in each participating country to achieve satisfactory liquidity,” she adds.