1) Trading takes place on several markets in the CR
2) Trading five times a week on the Stock Exchange
4) PSE measures to support direct transactions
6) The RM-S running auction introduced
7) Capital market liquidity has fallen significantly since Q2
8) Most trades are carried out outside official markets
1) In the Czech Republic two organisers of the securities market exist: the Prague Stock Exchange (an automated trade system and direct trades) and the RM-System (running and periodical auctions). In addition, securities can be transferred directly over the counter at the Securities Centre (SCP). These markets differ in many ways: by the method and speed of settlement, price setting, liquidity, costs, price levels and market breadth.
From the beginning of 1994, the capital market can be characterised, until the beginning of February, as a market with an unambiguously upward tendency (bull market). This was followed by a period of stabilisation, and since the end of February and beginning of March the market has been declining. The bottom was reached approximately in the first half of June when a short recovery began, unaccompanied, however, by a desired rise in liquidity. The price level remained virtually unchanged until the close-September and only some prices of individual securities fluctuated.
2) The Prague Stock Exchange (PSE) has gradually accelerated its trading frequency. In virtually one year it switched from trading once a week to daily trading starting September 19, 1994. At the same time, the maximum price margin allowed was reduced from +-10% to +-5%. More frequent trading, however, does not mean that the system of settling transactions on the stock exchange (T+3) has shortened.
3) On the stock market, the trend from the close of last year continued until the beginning of March when prices and volumes of trades significantly rose under the influence of foreign demand. The CNB-120 Index, by which the central bank monitors developments at the PSE, reached its maximum value of 1394 (the index base of 1000 refers to values on December 16, 1993). At that time it had already become apparent that the prices of many shares were overvalued. The market turned around and fell at virtually the same pace. However, the breadth of the market (number of issues traded) did increase, but trading volumes fell sharply. The steep fall in prices came to a halt at the beginning of June. The summer months can be marked as a period of fluctuating rates in individual sessions, the price levels remaining stagnant. The total capitalisation of the share market reached CZK 395 bn as of 30.09.94.
Since August shares of funds have started to be very active. Prices of many of these rose by the permitted maximum 10% in several sessions in relatively good volumes. Nevertheless, most stock exchange indexes stagnated, because important segments in the composition of all the indexes belong to CEZ and banks, and these recorded virtually no price movements.
On the advanced capital markets the so called "discount" (difference between the market price of a fund share and the value of property represented by this share) ranges from 10 to 20%. However, in the case of fund shares traded on official markets in the CR, the discount rate ranged from 50 to 80%, i.e. prices were strongly undervalued. In outright trades they were virtually untraded, since, due to scattered ownership, it is very difficult to obtain a large package of these securities all at once.
4) The fall in total trades was manifested primarily in low volumes of direct transactions. In an effort to change this unfavourable situation, the PSE took several measures. The original 10% margin of the final price of all securities in the automated system was expanded first to +-20% and later to +-25%. The minimum volume limit for a single transaction was lowered to CZK 0.5 mil. for unquoted securities and CZK 1 mil. for quoted securities. These measures however, were more noticeably felt as late as September when trading was expanded to 5 days a week.
5) Due to the falling trend on the share market, investors focused their attention on securities with fixed interest rates, i.e. bonds. Following a relatively lengthy period in which these securities were traded only in symbolic quantities, bonds gained greater recognition. The credit for this goes mainly to outright trades of quoted bonds (state bonds, CEZ and KB bonds). However, an increased interest in debt securities also failed to halt the overall decline in trades.
Newly issued bonds carried an interest ranging from 2 to 3% above the inflation rate expected in 1994. However, the market absorbed the primary issues of these securities at prices above their nominal value - explainable by the expectations of institutional investors of a still lower inflationary rate (and therefore lower interests on banking deposits).
6) Several significant changes took place in the RM-System in 1994. The periodic auction was shortened to 14-day cycles, and since February 2 of this year transactions can be made in the so called RM-S running auction. These auctions differ from each other in the frequency they take place and also in the method of price setting (periodical auction - fixing, running auction - continuous trading).
The running auction has gradually begun to take over the role of the periodical auction. Since September 1 this year, trading in this auction has taken place five days a week. At the same time, a new index for RM-S running auctions, the Index PK 30 has been announced. The date of May 3, with a value of 1000 points was established as the baseline. The main reason for its creation was the fact that a periodical auction gradually loses its meaning and its index, the RM-S 100, is not very precise. The fact that trading in the running auction takes place in real time, i.e. settlement takes place the same day, is very important for investors. The RM-System also offers an interesting possibility of submitting combined orders for both auctions.
7) The dependence of the Czech capital market on foreign markets is clearly evidenced here. The fall in trades and prices which hit most foreign stock exchanges took place at the PSE as well. Besides the decline in foreign demand other facts have also contributed to lower market liquidity. They were as follows: the need to mobilise almost CZK 15 bn for the subscription of new shares of banks and some enterprises, the ongoing second wave of voucher privatisation, and above all, the possibility of transferring securities directly at the Securities Centre counters.
8) According to some indications about 80% of all trades are settled at the SCP where transactions are settled the same day and trades thereby avoid the possibility of a delay and the higher risk of a securities transfer through the stock exchange and its register. The high percentage of trades carried on outside official markets makes the Czech capital market largely non-transparent, which is an unfavourable sign for potential foreign investors.