Strategies for stock market development

American Chamber of Commerce Outlook,

July 2, 2010

Tālis J. Putniņš, SSE Riga and BICEPS

Why develop financial (stock) markets?

• Two fundamental roles:– Pool and transfer household savings to investment by

firms– Efficiently allocate capital to its most productive uses

• Banks are good; stock markets have advantages– Allocation efficiency– No collateral, high risk projects– Diversification => larger pool– Exit option for VC

Where we stand today

Sources: World Federation of Exchanges, European Federation of Exchanges, World Bank, author’s calculations

Liquidity AND Information

AND Shareholder protection

Cost of equity

Investment (market cap.) and econ. growth

Positive steps taken to date

• EU accession• Securities law reform• Incorporation into Nasdaq OMX group• Move to INET trading platform• Acquisition of electronic surveillance technology• Provision of real-time market data• First independent institutional equity research

company in Baltics (Emerging Nordic Research)

10 Directions for the future (1)

• Liquidity– Market makers (paid for by exchange or firms)– Maker-taker pricing of liquidity– Consolidation of Baltic and Nordic exchanges - a

single market– Trading in Euros– Subsidized IPOs (liquidity externalities)– Partial privatization

10 Directions for the future (2)

• Information– Increased regulatory pressure on firms’ information

disclosure (enforcement)– Stock analysts

• Shareholder protection– Active and visible enforcement

(public, and more favorable conditions for private)– Cross-listing in developed markets

Conclusions

• Stock markets are important

• Market capitalization is the result, not cause of a functional market, i.e., privatization is not a complete plan for stock mkt. development

• Recommendation: simultaneously pursue strategies to improve:– Liquidity– Information availability– Shareholder protection