LETTERS FROM THE READERSThe growth of the BSE market is an optical illusion

Ziarul BURSA #English Section /

The growth of the BSE market is an optical illusion

In this section, "BURSA" publishes opinions from its readers.

The presentation of the daily turnover of the BSE in the trading summary displayed on the webpage of the Bucharest Stock Exchange, as well as in its monthly, quarterly and annual statistics, including in the reports sent to investors are all mistakenly structured and they induce mistaken perceptions into the consumers of that type of information. Even most of the press has adopted the erroneous liquidity concept of the BSE and accepted it to mean the sum of what is traded daily on the BSE.

And here is why that is inaccurate:

The liquidity of a stock exchange is that specific information which should show those who are interested in that kind of information the market's ability to absorb investments on the market segment where trades actually get executed through mechanisms that are specific to a market, in a continuous manner and based on the models of industrial practice.

When investors look at the trading summary of a stock exchange, they have to ensure that if that summary amounts to 10 million dollars per day, then the market has the ability to execute daily, through its trade registers, in the continuous market, trades of that scale.

That is definitely not the case on the BSE. What the BSE does is add apples and oranges, in other words the trades executed in the continuous market with the value executed through the occasional IPOs and the values of the trades negotiated on the "deal" tier. After adding all these numbers, we get a median value that is not relevant at all. To anybody. That makes the so-called liquidity ratios perhaps more than twice higher than they really are.

This is defrauding the foreign investors, we make them think that the liquidity is bigger than it actually is. And they know that, and that is one reason they think we are not trustworthy.

We are cheating the shareholders, we are trying to tell them that the Stock Exchange is doing better, that it is growing, when in fact it isn't.

That the IPOs are being conducted through the stock market, is only partially true: the biggest chunks of the IPOs are performed with closed books, at the brokerage firms. We won't debate whether this is good or bad. We can only say that these amounts should not be added and the resulting sum used to determine the average liquidity of the stock market. At the end of the day, and only in a particular case, these amounts could be used to calculate the median liquidity of the BSE: when the BSE will regularly have one IPO a month, which will not be the case in the following years, unfortunately.

Another claim that is completely false is that the "deal" tier should be included in the average daily turnover. Stock exchange methods for price discovery are not used at all in the negotiated trades ("deals"). The "deal" is a trade that is performed entirely outside the market. The stock exchange plays no part in it. That deal could just as well be executed OTC, directly at the Central Depository, it would be far cheaper for the participants, and in doing so, the depository would stand the chance of increasing its revenues and escaping the angry watch of the CEO of the BSE who is cutting its expense budget (the extent to which he does that and the way he does it are arguable: he only allows the Depository to make money on the trades being executed on the Bucharest Stock Exchange, and then he chastises them for charging fees that are too high - that really is not right).

Essentially, by lumping together these trades which he insistently promotes in order to show a stock market that is bigger than it actually is (he is using a kind of "window-dressing"), the CEO of the BSE is misleading the public interested in the stock market in several ways:

- he hides the real ability of the BSE to absorb the investments in the market, which is currently half of what it is claimed to be. As proof of that statement, we produce the fact that the median daily turnover of the main market in 2014 (shares traded in the market using trading orders) is in fact half of the displayed value. In fact, the BSE market only has a turnover of 20 million lei a day, less than 5 million Euros (see the last column of the table), without exceeding in a visible or conclusive manner in 2014 the average of the 2010-2013 years, " at least so far" (we have a median of 20.11 million lei in the first five months of the first five months, compared to only 20.8 million lei per day on average in the previous four years);

- it hides the relevance of the main tier of the exchange, which is decreasing at an accelerated pace. The prices set by the exchange through its main tier become irrelevant, because only half of that amount participates in setting the reference price. In that regard, the question that gets asked is: does the CEO of the BSE maintain an orderly market, with relevant prices, like a stock market should be? Does the BSE make the price in the market? Or outside it? The chart proves beyond a doubt that the main tier has lost in the last five months almost 20% of its relevance (from 63% to 51%), the biggest annual drop in the last four years.

- it hides the weak performance of the management. The real market isn't growing visibly this year either, even though it has the benefits of the IPOs that happened in 2012 and 2013, of the changes in legislation that allow the SIFs to hold shares in each other, of significant marketing and promotion budgets, and also of an improved economic context and sovereign rating. The chart shows that the median for the year 2014 of the shares traded on the BSE (in other words the market, its real liquidity) has increased by less than 5%.

When making these observations we also need to consider the context where the number of investors has decreased lately, and the data is already official, the Fund for the Compensation of Investors has published them last week.

When looking at these numbers, we also need to keep in mind the statement of the president of the BSE, Lucian Anghel, who assured us last year, that investors were anxious to come and trade on the Bucharest Stock Exchange, and they would follow the new CEO Sobolewski, the guarantor of the development of the Romanian stock market.

For the moment, some of them have left. More of them may come in the next IPO made by the state, (not one attracted by the Bucharest Stock Exchange itself!), they will buy in the IPO and then they will sell on the "deal" market, like they did at Romgaz.

It would seem that these investors that Sobolewski brought do not care about the market, they only care about the deal.

The numbers in the summary will increase, the liquidity of the market will increase, but not enough. The relevance of the market may even drop. Just like in the case of Romgaz.

But we have paid and are paying for them to grow. Perhaps in advance.

Editors' note 

The intervention of our anonymous reader is valuable because it signals that the daily average value of the trades on the Bucharest Stock Exchange is not relevant.

The truth is that liquidity has a rather ambiguous definition.

According to Investopedia, liquidity is "The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity".

According to the quoted website, there is no specific formula for liquidity.

As long as we take liquidity to mean the ease with which we can sell a share in the market, the author of this opinion is right to say that on the main market of the BSE, the average of the daily trades has no relation to the day-to-day liquidity.

The trading of the shares is not as easy to do on the BSE, at any rate, not at the scale of the median value of trades.

That is why we consider this opinion to be opportune, because it dispels an illusion.

After the merger of the Rasdaq and the BSE, everybody hoped that the Rasdaq would be contaminated by the rigorousness of the BSE. Unfortunately, the opposite is happening.

Sobolewski, for instance, mistakes the liquidity for the average daily turnover, and because of that, he is fascinated by the privatizations, without paying attention to the main market.

In the same context, the failure of the AdePlast IPO becomes a failure of the market.

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