The relationship between Frankfurt and Vienna has always been congenial, even as the latter has had to get used to the changes in status over the past century. This century is no different, and while their strategies are currently headed in different directions, they still have their joint venture, Newex to nurture.
Frankfurt was forced to delay the launch of its much-heralded Xetra US Stars last month. Deutsche Börse was to start trading US stocks in euros on September 14, just two days after the terrorist attack on New York and Washington. The new segment will contain all of the US stocks in the Dow Jones Industrial Average, S&P 100, Nasdaq 100 and Dow Jones Global Titans 50. The total of some 200 US stocks can be traded on Xetra just as easily, quickly and cost-effectively as German blue chips. This optimises the quality of trading in US equities for private and institutional investors, and the costs are reduced to the level of a domestic securities transaction.
Walter Allwicher, head of media relations at Deutsche Börse, says the segment is an example of the continuing strategy of business expansion. “This is a liquid market in Germany, where the home market is not Germany. Unlike in the US, this is a hybrid market model, with competitive ordering. We see it as an attractive initiative because it bundles the cash market, exchange traded funds, and finally equity options. Our partner, Clearstream, is ensuring an efficient clearing solution for the new initiative.”
Despite growing the business in this way, do not rule out further acquisitions or mergers from Frankfurt. Xetra US Stars is an ambitious launch, and confirms that after the iX fiasco, Frankfurt is still leading European exchanges when it comes to business expansion. “There are various options,” says Allwicher. “This way of growing our business is one route, but that does not mean we may not take another road in the future. Everyone in this industry claims to be in ‘the usual discussions’. We still see our chances to grow in various ways, and remain dedicated to our strategy of developing partnerships.”
Meanwhile, there has been concern in Vienna, at the Börse and the Federal Ministry of Finance (BMF) as well as at Oesterreichische Nationalbank (OeNB) about the state of the Austrian capital market. At the beginning of the summer, a broad initiative aimed at reviving the market was launched by the three parties and the Boston Consulting Group. The objective was a “fundamental and sustainable revival of the Austrian financial marketplace”. An announcement is expected soon naming partners who will help develop the new initiative.
It is intended to target Austrian companies, aiming to hone their competitive edge in the international market place. The hope is to replace traditional banking support with a well-functioning capital market. There is little surprise that concern has been expressed since with a trading volume of $10bn (E10.8bn) and a market capitalisation of US$30bn in 2000 (16% of GDP), Austria’s capital market is currently, in both absolute and relative terms, one of the lowest ranking among the European countries. Given the high regulatory standards, this state of affairs is blamed on deficiencies on the supply and demand side.
The main reason for low market capitalisation is Austria’s economic structure with its high percentage, even by European standards, of exchange-listed small and medium-sized companies. The position of these small and medium – cap companies has been taxing the Börse for some time, and a new strategy is currently being developed. The exchange is now set to focus on these companies, and is about to restructure its market. A study was commissioned earlier this year from the Market Research Institute, and many of its recommendations have been acted upon. Discussions are currently going on between market members and the Börse management, and an announcement is expected later this year. The ATEX and speciality markets are to be restructured, and launched in January 2002. The exchange is reluctant to give away the names of the new segments and indices, or exactly what the changes will do to help develop these stocks.
This represents something of a shift of emphasis for the Börse. The move to specialise in small and medium stock, in an attempt to attract more companies to the stock market, will be seen, in some quarters, as an admission of defeat. For many years Vienna’s attempts to attract a number of large companies to seek a listing on the exchange have failed. Many of these are privately or family owned or are operating in Austria as subsidiaries of foreign companies. The balance may be helped by the planned privatisation of ÖIAG (Austrian Industry Holding AG).
Nevertheless, the Börse is making a determined effort, carrying out research into companies which may wish to come to the exchange, and putting together a specialist IPO team. Although concentrating currently on domestic companies, in the long-term this may change. For now, however, the pitch to Austrian companies is that the Vienna exchange is best positioned to promote them and gain access to domestic investors.
On the demand side, the Austrian marketplace is marked by a low percentage of shareholders. In 1999, 6% of the Austrian population held stocks, low by European standards. Since the end of 1999 however, the number of domestic shareholders has risen to 7.5%. An information campaign called Investing in Austria, that focuses on the potential of Austrian companies, has been launched to raise this percentage even further and increase the demand for Austrian stocks.
Institutional (foreign and domestic) investors however, show a below-average interest in the Austrian marketplace. Austrian stocks, for example, account for only about 2% of the assets managed by Austrian investment funds. The Austrian pension system is a pay-as-you-go scheme with a strong emphasis on the state pension plan, making only low funds available to the capital market, as opposed to other countries.
Despite this background in general terms the Börse has performed quite well this year to date. Trading is a little down on last year, but ATEX was the best performer in Europe during the first half of the year, and the market has been very stable unlike many of its neighbours.
The news from Newex is that it has taken over the control of one of FWB Frankfurter Wertpapierbörse’s regulated unofficial market segments. Since the summer, all the shares in FWB listed by Central and Eastern European issuers have been combined under the name “NEWEX”. Since August, the NEWEX shares with the highest turnover have also been traded in Xetra. In this way NEWEX now offers all market participants access to central and eastern European shares both in Xetra as well as in broker-supported floor trading.
Initially, the shares will be traded in continuous auctions with liquidity providers, as well as in single auctions. In the short term, it is planned to introduce a form of continuous trading which would integrate a minimum of two market makers.
Frankfurt then continues its plans for alliances, while growing its business to perhaps finance a surprise move. In Vienna meanwhile, caution remains the watchword, as the exchange looks to consolidate its position in relation to small and mid-cap stocks, hoping to carve a niche market. Strange bedfellows in NEWEX perhaps, but it looks like being an interesting New Year for both exchanges.