Having shed two of its assets – the exchanges of Budapest and Ljubljana – the CEE Stock Exchange Group, with owner Vienna Stock Exchange at the helm, is steering a new strategic course. Its aim, as Stefanie Linhardt reports, is to become a leading service provider for central and eastern Europe's exchanges. 

All change for CEE Stock Exchange Group

Once focused on creating a large stock exchange group for central and eastern Europe (CEE), Vienna Stock Exchange has changed its strategy. Its new vision centres on data and IT, and becoming the leading service provider for the CEE region’s exchanges, but challenges remain.

The once four-member-strong CEE Stock Exchange Group (CEESEG), owned by Vienna Stock Exchange, included the exchanges of Budapest, Ljubljana, Prague and Vienna, but now only the latter two remain and the group has reconsidered its objectives. While in 2015 it reported another positive year – with trading volumes across exchanges up about 25% on the previous year, supported by a strong performance in Budapest, Vienna and Prague – the group decided to sell its stakes in the exchanges in Slovenia and Hungary.

Sale decision

Vienna Stock Exchange had been approached by two potential buyers and both offers had been “quite attractive”, says CEO of CEESEG and Vienna Stock Exchange Michael Buhl. This led to a decision to sell its stakes. The Hungarian National Bank is now the majority shareholder in the Budapest Stock Exchange, with Croatia’s Zagreb Stock Exchange buying 100% of the exchange in Ljubljana.

The sale added more value to Vienna Stock Exchange than just the proceeds of the transaction. “We have switched from the concept of owning to the principle of sharing – sharing means that we will still be the IT provider for all these stock exchanges,” says Mr Buhl. “So by selling two exchanges, we are not shareholders anymore but are IT service providers, and we actually won one client, because Zagreb bought Ljubljana Stock Exchange, and it will switch to our system.”

Even before the sales went through, the exchange was in the business of providing IT and services on a co-operation basis to exchanges, as it had deals with Bosnia-Herzegovina and Serbia. By retaining its position as the IT provider for the exchanges in Budapest and Ljubljana, as well as onboarding Zagreb’s IT system, the sales supported the group’s new strategy of focusing on being a service provider and data vendor rather than consolidator of exchanges. And Mr Buhl’s exchange is looking to further profit from this.

Data is the future

CEESEG is further expanding its data vending agreements with stock exchanges in the region. Vienna Stock Exchange is in the business of selling stock exchange data – not only from Austria, but also from other exchanges – to some 250 data vendor customers.

“If customers can, at a small additional price and under the same technical interface as they receive Austrian data, also get the data from those smaller stock exchanges, they are usually ready to take it,” says Mr Buhl. “That means extra money and value added for those stock exchanges as well as for us, as we usually have fee-sharing agreements in place and, with data being shown more prominently on international screens, trading members get appetite and start trading, bringing additional volume to those stock exchanges.”

Vienna Stock Exchange customers can subscribe to price information from eight further locations – Bosnia-Herzegovina, Croatia, the Czech Republic, Hungary, Kazakhstan, Macedonia, Serbia and Slovenia – as well as from the energy exchanges CEGH Gas Exchange of the Vienna Stock Exchange, Energy Exchange Austria and the Power Exchange Central Europe in Prague.

Data is a big business. Not only are clients able to buy generic trading data but there is also a market for enriched data – and it is growing. Examples of enriched or value-added data include information collected on days of corporate actions – such as related ratios, pay-out dates, historical data or even information on implied volatility.

“It is a big business and the multiplier is strong,” says Mr Buhl. “You have millions of data sets every day, which adds up to quite a significant amount.” So significant, in fact, that data vending has become the second largest income stream for the stock exchange in Vienna.

And, despite the move away from exchange ownership in the region, Vienna Stock Exchange is still one of the main providers of indices for the region. Of the 77 indices Vienna Stock Exchange calculates, 53 are related to regional, national and sectoral specifics in the CEE and Commonwealth of Independent States countries, many of which are being used as benchmarks or for the issuance of index products, such as exchange-traded funds, warrants and certificates.

“We are currently co-operating with 12 exchanges within CEE – either in relation to data vending, index licensing or IT services,” says Mr Buhl. “This shift to sharing rather than owning allows us to [curtail] the risks related to ownership.”

Regulation woes

Ownership-related risks range from specific business performance issues unique to each exchange to more generic difficulties, such as regulation and industry trends – offering a potential explanation for Vienna’s strategic decision to focus on providing data and being a service provider.

However, challenges still remain for Vienna Stock Exchange – in the shape of trading activity outside the exchange and the risk of de-listings.

The trend of bypassing exchanges through multilateral trading facilities (MTFs) and over-the-counter (OTC) trading is threatening exchanges’ revenues across Europe. These innovations have been encouraged by regulation, such as the European Commission’s Markets in Financial Instruments Directive I (MiFID I), implemented in 2007.

“On the MTF side, for three years we have seen a stagnation in the erosion of our market share, and since mid-2015 our market share is actually slightly increasing again,” says Mr Buhl, noting that this shows that some consolidation has been reached on the MTF side. “Market participants now seem to appreciate that the main liquidity and the most transparency is still on the stock exchanges.”

While he believes that MTFs will remain a challenge in the future, Mr Buhl highlights OTC trading as posing the more immediate threat. OTC trading, which was left largely unregulated under MiFID I, allows for trading in stocks, bonds and other securities off exchanges and through brokers making markets in specific issues. As such, there is very limited pre-OTC trade transparency in the trading levels of securities.

The revision of MiFID regulation, MiFID II, will include some stricter rules and requirements for OTC trading – a development Mr Buhl welcomes. However, the implementation of MiFID II has already been postponed from 2016 to 2018 by the European Commission, which has led to concerns that calls for retrospective adjustments to the proposals could be met.

“The EU needs to be urged to come up with a new date for MiFID II as soon as possible,” says Mr Buhl. “The discussed postponement means a standstill in development and a risk that lobbying forces use the postponement to try and open the package up again and lobby for adjustments they did not achieve in the first round.

“But if the commission gives in on that, we won’t talk about [an implementation by] 2018 any more but even later,” he adds. “I think this is a great danger.”

CMU hopes

The other major challenge Mr Buhl sees comes from already-listed companies making the decision to de-list. In 2015, Austria witnessed six de-listings, the reasons for which ranged from bankruptcy and restructuring to an unwillingness to bear the burden of conforming with disclosure requirements or costs related to the listing.

“If a company reports five minutes late, it is already under scrutiny from the supervisory authority,” says Mr Buhl. “The regime has become very rigid and restrictive, so especially some smaller companies, family-owned businesses and those with small free floats decide that it is not worth the effort and there is a temptation to go private again.”

But, with the 2014 appointment of Lord Jonathan Hill as European Commissioner for financial stability, financial services and capital markets union, and his plans to implement a capital markets union (CMU) in Europe by 2019, there is scope for improvement. Plans for a reform of the prospectus directive, which will reduce requirements related to issuances of securities in Europe, are being received with open arms by market participants.

Mr Buhl is hopeful that CMU plans to reduce the size of security prospectuses to about 40% of their current volume and provide a lighter regime for smaller issuers could improve the situation. “Mr Hill wants to get rid of some of the rules and regulations in place that are hampering the market,” he says. “I can fully sign up to that but we will have to see what actually comes out at the end.”

Changes already planned to regulation are favourable for Vienna’s stock exchange and others focusing on providing data: MiFID II – if implemented as planned – should allow for competition between data providers in Europe. But again, lobbyists are trying to push for adjustments to the proposal, hoping a monopoly could lead to cheaper prices.

In the midst of all this, Mr Buhl’s immediate aim is the migration of Zagreb Stock Exchange’s trading system, which is a task on its own. 

“Both exchanges, Ljubljana and Zagreb, are very dedicated but you also need to make sure that market participants are,” he says. “Everybody has a different infrastructure, which we need to accommodate. Bringing the market together and telling everyone – at a time when everybody is cutting costs – that migration is not going to come for free is probably our biggest challenge.”


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