Strategies for stock market development


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





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


• 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