Q&A: Behind the Baltic Bourses

  • 2008-04-16
  • Interview by Mike Collier

Daiga Auzina-Melalksne, chairman of the Riga Stock Exchange management board, OMX Nordic Exchange Baltic market

Could you give us an overview of the Baltic bourses' origins? 
After the Soviet Union broke down each country established a stock exchange, about 15 years ago... We invested a lot of resources in developing a stock market - educating companies, managers and the general public about what it means to be on the exchange, what is important for good investor relations, what are reasonable expectations from shareholders.

At the same time, we realized that the three Baltic states are all really small. If you look at the stock market, it's even smaller. Therefore, around six or seven years ago, discussions started among the Baltic exchanges that maybe we should join forces, but it has remained just talk. Then the Helsinki exchange, HEX, bought stakes in the Tallinn Stock Exchange and Riga Stock Exchange, but in the end Stockholm Bourse, OM, bought HEX.  Renamed as OMX, the company continued expansion.

After we had a joint owner in OMX we started work on establishing a joint Baltic market. We realized that investors view the Baltics as one investment area. We thus concentrated on building a joint Baltic market with higher liquidity and broader investment opportunities.

EU accession was also a great boost to the market because it brought standard legislation and helped new investors become interested in the Baltics. Over the last four or five years we have done quite a lot. We established Joint Baltic Memberships, so if you are a member in one of the local exchanges you can automatically become a member in the other two exchanges.

All the foreign investors that came in because we have the same trading infrastructure the Nordics have, it's really easy for Nordic members to connect. And if their clients ask for Baltic securities it's easily done.
In the last year we have also established an alternative market in the Baltics, called First North. We basically took the same model as our mother company and made just some little adjustments.

What sort of companies do you see listing on there [the new exchange]? 
The main target will be companies that are developing very fast and that do not have established operations yet and need capital. Regardless of the real estate crisis and inflation companies still need money. If the business is attractive and the management is educated enough to know what is expected, they can attract capital there. We believe there is good potential because if you look at the regulated market there are only a limited number of sizeable companies that can apply because of the requirements. For the alternative market, the potential company base is a lot wider.

Wouldn't it be more sensible just to reduce the entry criteria for the main exchange? 
Well, the main reason why the alternative market was established was because of EU directives. Compliance with directives is nice, and good 's but very costly and not always justifiable. It's one thing for a telecoms company with hundreds of employees to meet the criteria because they can have five people working on investor relations, but if you are a small company, every person counts. Basically the regulatory framework is lighter for the alternative market. Issuers there still need to be transparent and for the alternative market we have set the minimum requirements.

Nasdaq is now one of your ultimate parent companies 's are they going to have any input into the alternative investment market? 
It's too early to say. We know we are small, but if you look from the Nasdaq perspective we are really small. So we'll have to wait and see.

Might people start talking about a 'Baltic Nasdaq'? 
[laughs] We are always open to talk about that at some point! Opportunities are always there but it's really too early to say.

At the moment we have the Nordic list and the Baltic list and we've decided to leave it that way. Baltic companies can gain much better visibility here in the Baltics. However, when they do an initial public offering they go to the Nordics for capital. Nordic institutional investors are always targeted when there is a Baltic IPO.
But we have to be realistic and first explore opportunities locally. We've already had 11 IPOs in the Baltic market during the last four years, and of course we would like more, but you have to see how companies are developing. The first source of financing, quite naturally, is a bank loan, and in Latvia the banking sector has been really strong, which you can hardly say about investment banking.  If you look at Lithuania there are a lot of small investment houses that are not related to the banks.

Do you see the three Baltic bourses retaining their separate identities in the future or consolidating into one single identity? 
Our main target is that investors view us as a single investment area 's and I think we have achieved it. The legal set-up is for us. Now we are working on a joint clearing settlement system and are looking to possibly introduce euro trading and euro settlement. We are currently undertaking a feasibility study on that so that later this year we will be able to say what the costs and benefits are.

Would euro trading provide a significant stimulus?
I think so, if only because it costs you to change money.

I've sometimes heard quite dismissive things said about the Baltic exchanges 's for example if they stopped trading tomorrow it would make no difference to the economies...
There are also people for whom it won't make a difference if the U.S. government defaults. We service companies with market cap of 14 billion euros and investors won't share that point of view. There are a lot of other things we provide besides equity trading. Govern-ment bonds are traded, the bond market is such that all the banks have issued mortgage bonds and our clients say that being on the exchange helps when they are speaking to foreign partners who don't know them. The fact that they are listed and their financial reports are available greatly adds to their credibility. As someone once said: "A bourse is like opera 's you can live without it, but it's better to have it."