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Corporate law and governance, financial transaction taxes

Project Group №1

Financial infrastructure and financial market regulation


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No Investor In His Own Land

12.10.2011 / Interfax

In the past two years the Government plan for the International Financial Centre formation was implemented. It`s too early to evaluate the results of this effort, but as for the internal market development it can be surely said that no progress has been made. Such is the common opinion of the members of the National Association of Stock Market Participants (NAUFOR) at "Russian stock exchange market" conference in Ekaterinburg.

“The Russian stock exchange faces the same challenges as five years ago. They is a narrow variety of listed shares, low volume of the fixed income market. The concentration of shares turnover is rather high. There are no long-term internal investors, who define the trends of the national market, and attract long-term global investors", stated the Head of the NAUFOR Alexey Timofeev.

BROKERS ARE LEAVING

The amount of broker companies has been decreasing in Russia during the last few years. The most difficult situation is in the regions. As Head of the Ural Federal District office of Federal Service for Financial Markets (FSFM) Svetlana Furduy informed, at year-end 2010, 12 licensed securities market participants left the regional market, in 2011 there are already 13 such companies.

In the last two years not a single new company entered the Ural region market. So, at present time 62 professional securities market participants are working in the region. "Only the "gold reserve" of the real working licensed participants is left", mentioned the head of the regional FSFM office.

There are a few reasons for the decrease of the number of licensed participants in the securities market. First of all, the notorious crisis, which increased the Russian market volatility that led to the decrease of trading clients. "At the end of last year we had (considering that brokers` shareholders and clients are often the same person) about a million nationals. This amount has almost remained unchanged during the past half-year. My colleagues mention that people who already have accounts bring the money in, new ones almost do not come. These numbers evidence that Russian people have almost no interest in the stock exchange. And this is one of the most negative sides of our market. The amount of active investors has been decreasing noticeably", said Alexey Timofeev.

Besides, tougher requirements for licensed participants affected the amount of brokerages. Last year, the minimum proprietary capital reserve for brokerages was increased from 10 million to 35 million Rubles. Although this year an expected further increase was canceled, brokers and other licensed participants continue giving up their licenses voluntarily.

OUT OF THEIR ELEMENT

"Where did they get the crazy 35 million amount from? We need to go back to the old capital requirements. I would like to address the regulators, as they need to balance the regulation and the market volume. The market should be diversified. Otherwise we will have nothing", Vitus Investment Company General Director Sergey Chernov said.

"In the twenty years of my career in the market, I have not seen any state support for our business. All the time they just toughen the requirements", said Anna Shakirova, Sinara Invest General Director. According to her, as a result of increased reporting demands from the regulators and exchanges, 70% of the employees in her company are involved in reporting, and only 30% generate new business. "Regardless of the tough requirements we are still alive", she underlined.

Sergey Chernov compared the Russian stock exchange with "a two-year-old kid wearing his father`s suit, saying: look what I’ve become, I have a suit, I’ve got anti-money-laundering here, and here is anti-insider trading". But in five seconds, his legs start shaking - the suit is too heavy. And he can`t move, he trips and falls over", he said.

THE SBERBANK THREAT

"Why do you need discount brokers when there is Sberbank, with all their network and their massive client experience?! There’s also VTB 24. Times are rough in the market, a broker offering brokerage services only has no chance to survive", says General Director at BKS Yuri Mintsev.

He sees the only way out for brokerages in diversifying. "Apart from brokerage, you have to offer asset management and cash management plus a wider access to markets, in Russia and abroad”, says Mintsev.

Head of Retail Brokerage and Sales at Sberbank, Dmitry Brusintsev sees private brokerages as tutors for private Russian investors. He says Sberbank is seeing a rise in private clients this year, albeit all of them are in need of financial ABC. The bank lack an opportunity to offer training programs to clients right now, while private brokers can. "This is a social function that you are better poised for", he said.

One of the challenges Sberbank faces in brokerage services is the regulatory requirements for certified personnel. "It transpires that we have to have a certified professional at every point of sale whereas their function is simply to pass documents along ", he said.

FIGHT FOR CLIENTS

Troika Dialog Vice President Andrei Zvezdochkin says the real number of private clients in Russia is three times less than MICEX estimates of some 1 million. "A mere 300 thousand individuals are active in the market", he says.

Zvezdochkin says regulation-wise the Russian stock market is fine, new clients being the crucial point. "We need professionals and consultants that can bring new clients to the market".

"Another issue is conflict of interests. Brokerage is more profitable than asset management. Therefore, companies prefer selling brokerage services over AM, which is fine for long-term investors. In fact, clients are getting something they do not want”.

In his opinion,the investment horizon for most investors in Russian assets is short – a mere two years. Besides, unlike other BRIC countries, Russia has high inflation and the risk premium is some 5%, which inhibits high return.

Otkrytie SVP Evgeny Dankevich says the current deposit rate and no dividend gains draw people away from the stock market. "The Russian stock market needs breakthroughs like pension accounts", he said.

"To put together a company strategy on behalf of my Board of Directors, I surveyed the past 5 years of our market and went pessimistic. I started looking for a silver lining and found the 2020 Financial market strategy by the government. I read it in bed every day. If it all comes true, we will see the sky raining bread tomorrow, because by 2020 we are promised 20 million investors and a 20-fold increase in business", laughs General Director at Vitus Sergey Chernov.

FOREX – PRO & CONTRA

IT Invest COB Vladimir Tvardovsky names four problems that brokers have to face - "client base erosion", very low commission fees compared to the West, weak IT solutions in brokerages and weak Russian market infrastructure in general.

"Since 2000 we have seen a 50% client base growth, yet 2010 and 2011 show a different trend, people no longer come to the market. There are many reasons, including an abundance of FOREX traders that are essentially quite like one-armed bandits", Tvardovsky said.

RTS derivatives market FORTS is in no advantage either. "There has been a misbalance towards derivative market in recent years. Derivatives are for hedging risks, but we use this market for speculation. Ultimately then it is no better than FOREX", Tvardovsky said.

He added that RTS Derivatives workgroup has estimated the market volume and found that growing volumes fail to boost derivatives market liquidity. "Robots generate momentary liquidity in the derivatives market, effectively killing and washing out real clients who came to make money ", he said.

Tvardovsky thinks that FOREX kitchens should be legally banned. "Services for private individuals should be offered only by FOREX licensed banks and only to qualified investors".

Besides, to protect investors from bankruptcy, they need to invest long-term. "There should be a ban on opening accounts with less than, say, RUB 600k, while clients with only RUB 50k should trade on the MICEX spot market”.

Finam COB Vladislav Kochetkov puts in a word for the FOREX market. "This is a market with a right to live. If somebody wants to trade currency, they should be able to do that, why decide for them", he said. Besides, FOREX is offered by companies such as Finam and BKS, as well as VTB 24 state-owned bank, actively developing this service. "Even if you ban it, the ban will not be effective, as everyone operates via offshores".

LOW FEES

Russia’s traditionally low broker’s commissions lead to zero transparency of brokerages.

Tvardovsky says that Russian brokers do not generate enough revenue from commissions, which hinders growth and weakens the IT base. "We should free broker’s commissions from VAT. There is no added value there, the budget will not suffer from that”.

He thinks brokers are losing edge versus foreign companies. Clients that can make money sooner or later will want to trade elsewhere, with safekeeping and settlement in one place, and are prepared to pay more for it.

"Many brokers cannot offer one cash account. Today, only two – BKS and Zerich - can, but that is a virtual account, not for options", says Tvardovsky, adding that this is all due to weak IT base that fails to enable brokers to have simultaneous accounting for their derivatives and spot risks.

"Low broker’s fees are a long-time problem. A dead end we cannot get out of on our own", says Timofeev. This problem cannot be solved by brokers coming to a mutual agreement, as it will be considered a market conspiracy and a violation of anti-monopoly laws.

Project Group №1Alexey Timofeev