FINANCIAL MARKET

The activity of investors as measured by the velocity ratio of Warsaw Stock Exchange was relatively low at 35.5% in 2014. The low velocity ratio of WSE was mainly due to the relatively low value of free-float shares, representing only 48% of the total capitalisation of domestic companies. Furthermore, investors were less keen to trade on WSE in 2014, which is attributable to uncertainty about the pension fund reform, very low volatility, and a persistent lateral trend of the main market indices, as well as the political situation in Ukraine.

Velocity ratio of selected exchanges, 2014 YE


Source: WFE; own calculations

The global capital market has been increasingly impacted in the last few years by regulatory amendments introduced into the legal system of the European Union and the United States. Their main objective is to improve safety for investors and reinforce supervision of the capital market, and to liberalise the stock exchange sector and stimulate competition on the market. The EU regulations include MiFID,  which took effect in 2007, and EMIR,  effective as of August 2012. 

With continued liberalisation of the stock exchange sector in the past few years, competition among securities exchanges has intensified. Companies which operate regulated markets compete to attract new issuers and investors and to generate market liquidity and turnover. Further challenges for securities exchanges emerge with the rise of over-the-counter (OTC)  markets and multi-lateral trading facilities (MTF).  The offer of MTFs is mainly addressed to investment firms and institutional investors. MTFs offer trade in the same stocks as traditional exchanges but they also provide superior time of execution and low trading fees. Some MTFs have been licensed as exchanges, including BATS Chi-X Europe, formed through the merger of two independent companies and trading platforms: BATS Europe and Chi-X Europe. BATS Chi-X Europe is now one of the biggest trading platforms in Europe, second only to the London Stock Exchange Group. The platforms created under MiFID after 2008 accounted for more than 28% of trade in stocks in Europe in 2014 (Electronic Order Book). 

[1] Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments.
[2] Regulation of the European Parliament and of the Council (EU) No 648/2012 of 4 July 2012 (European Market Infrastructure Regulation).
[3] OTC (over the counter) market, where trade is made directly between market participants without the mediation of a securities exchange.
[4] Multilateral Trading Facility.

Trade in stocks on exchanges and MTFs[5]in Europe (EUR tn), EOB

Source: FESE

[5] MTFs and exchanges originating from MTFs (in particular: BATS Chi-X Europe, Turquoise, Burgundy, NYSE Arca Europe).

In 2014, stock exchanges around the world continued to diversify their sources of revenue, including additions to their product offers as well as geographic expansion, mainly to Asia. For instance, the London Stock Exchange (LSE) acquired Frank Russell Company, the provider of many popular indices. The deal strengthened LSE’s position on the American and Asian markets and ensured its strong position on the market of index providers. LSE acquired Frank Russell Company in response to evolving behaviours and strategies of investors who increasingly opt for passive asset management rather than active management. Another deal illustrative of the importance of geographic diversification in the stock exchange sector was the acquisition of the Singapore Mercantile Exchange (SMX) and its clearing house subsidiary by Intercontinental Exchange (ICE) in February 2014. The acquisition of SMX provided ICE with direct access to the Asian market infrastructure. Deutsche Boerse (DB) also focused on geographic expansion in 2014. The derivatives exchange Eurex, a member of the DB Group, acquired 5% of the Taiwan derivatives exchange Taifex in 2014. 

In 2014, Warsaw Stock Exchange finalised the acquisition of Aquis Exchange, the multilateral trading platform in London, which plans to offer trade in stocks from 12 European countries. The goal of the investment was to diversify further the sources of the WSE Group’s revenue and to fortify the brand of the Exchange on the international financial markets.

According to statistics of the World Federation of Exchanges[6],  the capitalisation of all stock exchanges around the world increased in 2014 for another consecutive year to US$ 69.3 trillion, representing an increase of 4.4% year on year. This was the best result since 2008 when the global financial crisis started with the collapse of Lehman Brothers. 

[6] The World Federation of Stock Exchanges (WFE) groups financial instrument exchanges around the world. 

Capitalisation of domestic companies globally, 2002-2014 (US$ tn)

Capitalisation of domestic companies globally, 2002-2014 (US$ tn)

Source: WFE

Stocks listed on American markets made the biggest contribution to the global capitalisation at 43.7 percent in 2014. The capitalisation of companies listed on EMEA (Europe, Middle East, Africa) exchanges was US$ 16.5 trillion, representing 23.8% of global capitalisation in 2014. The world’s biggest exchange is NYSE (USA) with a capitalisation of domestic companies at US$ 19.4 trillion, followed by NASDAQ OMX at US$ 7 trillion, Japan Stock Exchange at US$ 4.4 trillion, London Stock Exchange at US$ 4.0 trillion, and Shanghai SE at US$ 3.9 trillion. Only two of the top 10 exchanges (London Stock Exchange and Deutsche Boerse) are based in Europe.

Top 10 exchanges globally by capitalisation of shares of domestic companies, 2014 YE (US$ tn)

Top 10 exchanges globally by capitalisation of shares of domestic companies, 2014 YE (US$ tn)

Source: WSE

According to WFE, the total value of trading on the Electronic Order Book was US$ 73.4 tn globally, an increase of 14.9% year on year. The growth rate was mainly driven by an increase in the value of trading on American and Asian stock exchanges, by 15.8% and 16.9%, respectively. American exchanges made the biggest contribution to the value of trading in 2014 (56.1% of aggregate turnover). The value of trading on EMEA exchanges represented only 13.1% of the global trade.

Value of trading in stocks globally, EOB, 2002-2014 (US$ tn)

Value of trading in stocks globally, EOB, 2002-2014 (US$ tn)

Source: WFE

Similar to the capitalisation of domestic companies, NYSE was the leader by value of trading in stocks (US$ 14.8 tn), followed by BATS Global Markets – US (US$ 13.2 tn), NASDAQ OMX (US$ 11.3 tn), Shanghai Stock Exchange (US$ 6.1 tn) and Schenzen Stock Exchange (US$ 5.9 tn). The London Stock Exchange Group remained the biggest European exchange by value of trading in stocks (US$ 2.3 tn).

Top 10 exchanges globally by value of trading in shares, 2002 - 2014 (US$ tn), EOB

Top 10 exchanges globally by value of trading in shares, 2002 - 2014 (US$ tn), EOB

Source: WFE

POSITION OF WSE IN CEE

WSE was the biggest stock exchange in Central and Eastern Europe at the end of 2014 in terms of capitalisation, turnover, and the number of listed companies. The capitalisation of shares listed on WSE was EUR 139.1 bn at the end of 2014 (FESE data), representing a decrease of 6.5% year on year. The market value of shares listed on WSE represented 48.3% of total capitalisation in CEE, compared to 49.1% in 2013.  

The capitalisation of domestic companies listed on WSE decreased year on year while the total market value of shares on FESE exchanges increased by 4.8%.

A similar trend prevailed in the value of trading in shares in Europe and in CEE. The value of trading in shares was EUR 49.3 bn on WSE in 2014, representing 56.7% of CEE trade, compared to 58.5% in 2013.

COMMODITY MARKET

The Polish electricity market is a mid-sized European market both in terms of final energy consumption (more than 120 TWh/year) and the number of energy wholesale traders. These figures are comparable with the Dutch market. Europe’s largest energy markets, for instance Germany and France, are approximately five times bigger than Poland by consumption of energy.

The national electricity market is not fully liberalised because price tariffs still apply to energy sold to households. In addition, the liberalisation of Poland’s energy market came late compared with the old EU member states; consequently, the outlook of the Polish energy market offers potentially much more opportunity for growth than in the old EU.

The Polish electricity market is characterised by very stable energy prices, driven in 2014 by the following factors:

  • prices of the main fuel used in the energy industry, coal, which remained stable throughout the year and were slightly on the decrease (due to falling coal prices on global markets),
  • the relationship between domestic energy supply and demand for electricity, which remained stable throughout 2014, 
  • no major outages in the national power system and no evidence of a potential future energy shortage on the Polish market which could interfere with its operation.

The liquidity of the exchange market in electricity operated by the PolPX Group, which is increasing year after year (186.8 TWh in 2014), provides best proof of growing confidence of market participants in its reliable pricing and operational mechanisms. 

PolPX plays an important role on the domestic electricity market. Trade on the exchange faces competition of OTC trade. The total volume of OTC trade is lower than the total volume of exchange transactions on PolPX. However, it cannot be ruled out that Europe’s biggest energy exchanges may become active competitors of the PolPX markets in view of the strong outlook of the Polish market.

The European market is dominated by several large exchanges which participated in consolidations and now decide about the directions of development of the single energy market and its technologies. Nord Pool Spot (present in Norway, Sweden, Finland and Denmark) has expanded to the Baltic states (Lithuania, Estonia, Latvia); APX-Endex has expanded to the UK and has a presence in the UK, Belgium and the Netherlands; EPEX Spot has expanded to France (presence in Germany, France, Switzerland and Austria).

In the course of consolidations on the European market, smaller exchanges may lose their footprint, especially where their local markets are statistically and geographically small. With a very liquid energy market and good geographic location in Central and Eastern Europe, PolPX aspires to be one of the major exchanges.

The strategy and action plans of the WSE Group follow the framework proposed by the European Commission and the European Council including implementing measures of the European internal energy market and regional markets. The Agency for the Co-operation of Energy Regulators (ACER) launched in March 2011 works with national energy regulators to initiate changes in the models used on the local markets.

Under the EU Regulation REMIT, ACER is authorised to monitor wholesale energy markets for manipulations and inside trading. The REMIT implementing regulations approved by the Commission in December 2014 require market participants to report trade on wholesale energy markets as well as orders.

In 2014, PolPX worked with ACER to implement the reporting obligation on the Polish market. PolPX is ready to launch the service of reporting trade details to ACER as a Registered Reporting Mechanism under the requirements of REMIT. In February 2014, PolPX launched the Exchange Information Platform where market participants can publish inside information subject to the reporting obligation.

The European Commission and the European Council have confirmed the expected start date of the internal energy market by the end of 2016. Integration will begin at the regional level, followed by pan-regional integration a year later. The objective of the implementation of the European internal market is to improve the cross-border energy exchange capacity, to maximise social welfare for participants through rational costs of production and purchase and price convergence, and to create regional and EU service synergies ensuring energy security.

PolPX is actively involved in project work, aligns its technical infrastructure with market needs, and improves its IT system algorithms. With a licence agreement signed with the IT system owner Nasdaq OMX, PolPX offers trade on the Day-Ahead Market in electricity under European standards.