The analysis of the stock exchange market in Russia

Content

1 Introduction

2 Stock exchange market- theoretical aspect Primary criteria

3 Assessment of stock exchange market in Russia

4 Assessment of efficiency of stock exchange in Russia

5 Conclusion

Bibliography

1 Introduction

The stock exchange market is one of the key mechanisms for attracting monetary ressources for investment, economy modernisation and stimulation of the production growth in a country. At the same time the world stock exchange markets can be a source of financial instability and even of macroeconomic and social shocks.^[1] Esspecialy volatible to economic shocks are the stock exchanges of transitional economies, such as Russia, which was characterised as a one of the most risky countries in early 90 ies.

The transition of Russia from a plan to a market economy has caused increasing interest to stock exchanges as an important component of the stock market. Russian economists came to conclusion that stock exchange market is the nervous terminations of economy and of all spheres of the life of society. These nervous terminations react to the depth of the processes occuring in an organism, much earlier, than the organism itself. Therefore the stock exchange market is the lead indicator of what will occur in economy. But imperfection of the Russian legislation, absence of culture of corporate management, lacks in system of disclosing information and legal base demanding completion are the basic features of the exchange stock market in Russia. The purpose of my assigment, therefore, is to analyse the current competitive position of Russia on the world stock market, to reveal problems of modern Russian stock exchanges and to find out the reasons of their occurrence. The efficiency of the stock exchange in Russia will be assessed according to the models applied in the financial literature.

In order to reach this target first we have to look at the theoretical aspects of the core essence and main functions of stock exchanges.

2 Stock exchange market- theoretical aspect

2.1 The essense and targets of stock exchanges

Röhrl defines stock exchange as a firm that creates standardised transaction processes for standardised financial instruments.^[2] Stock exchanges can be devided in primary and secondary markets.

In the primary market, sale of securities to their first owners (investors) is carried out. All subsequent movement of securities occurs in the secondary market. Function of the secondary market consists,therefore, in providing liquidity of issued stock.^[3] At the same time, a primary and secondary stock markets are closely connected with each other. This interrelation is especially evident from the investor’s point of view. For him it is usually indifferent, if he buys the action, the bond or other securities of new release or already being in turn. For the investor the most important indicators for decision are the level of profitability, liquidity and reliability of the securities.

It is possible to subdivide the stock market concerning the place of a turn of securities. In this case we can talk about organized and non-organized stock exchange markets. Primary issue of stocks is carried out on channels of off-flor (non-organized) market. Secondary sale of securities can occur as on both stock exchange, and off-flor market.^[4] Only a small part of all securities is realised on organised stock exchange market in the developed countries. However the influence of this part of the market on the processes occuring in all stock markets, is very high.

The prices and the tendencies in the organized markets define in many respects the level and movement of stocks rates in non-organised exchange stock market.

The organized stock exchange market is presented by a network of stock exchanges, therefore we shall consider the mechanism of functioning of a stock exchange. According to the operating Russian legislation the stock exchange concerns to participants of a securities market, managing sales and purchases of stocks. Under the law, the stock exchange cannot combine activity of the stock trading organization with other kinds of professional work on a securities market, with exception of depository and clearing services.^[5]

Attributes of a classical stock exchange are: 1) it is centralized market, with fixed place of trade; 2) in the given market there is a procedure of selection of the best securities meeting certain requirements, such as financial stability and the large size of the emitter, the mass character of demand etc.; 3) procedure of selection of the best operators of the market as members of a stock exchange; 4) there are standard trading procedures on the market; 5) centralization of registration of transactions and calculations on them; 6) an establishment of official exchange quotations; 7) supervision of members of a stock exchange.^[6]

Therefore, the stock exchange is the organized, on a regular basis functioning stock market and it represents the mechanism extremely important for the organization of enterprise activity, and for functioning of modern market economy as a whole.

The stock exchange is created in the form of noncommercial partnership. The basic purpose of its activity is a creation of favorable conditions for large-scale and effective stock trade.

Incomes of a stock exchange are limited by the sums necessary for maintenance of its normal functioning and development. They are not used on payment of dividends to its shareholders. The operators of stock exchanges are banks, the investment and financial companies as well as funds, broker offices. To better understand the essence of stock exchange, we shall disassemble its basic functions in the economy of a country.

2.2 Economic functions of stock exchanges

The stock exchange acts as one of the regulators of the financial market. Its basic role consists in advancement of financial and loan capitals. On the one hand, it is accumulating and concentrating these capitals, and ,on another hand, it is financing the state and various economic structures. The role of stock exchange in a national economy is defined, first of all, by a share of the joint-stock property in manufacture of a total national product.^[7]

Functions of stock exchange are creation of constantly operating market; definition of the prices; distribution of the information on goods and financial tools, their price and conditions of the reference; maintenance of professionalism of trading and financial intermediaries; development of rules; indication of a condition of economy. One of the basic functions of a stock exchange is the mobilization and concentration of free monetary capitals and accumulation by means of sale of securities, and also transfer of the property rights.^[8]

Another function of stock exchange is the maintenance of a high level of liquidity of investments in stocks and guarantees of use of transactions.

Stock exchanges help to collect money for escalating manufacture of the goods of the raised demand and "suck away" money from the branches making the goods on which the offer has exceeded demand. Thus, stock exchanges coordinate the size of supply and demand in the commodity markets by providing development of a national economy in a direction adequating to the needs of consumers. The equilibrium money price on the stock exchange market really reflects the level of efficiency of the monetary capital.

The important problem of a stock exchange is maintenance of publicity and openness of the exchange tenders by the notification of its members about a place and time of tendering, about the list and the quotation of the securities admitted to the reference at a stock exchange, about results of trading networks. Another side of informational function is that through the analysis of the current situation on the stock exchange markets investors make their decisions about the market situation in the country.^[9] So, stock exchange markets are the “guiding lines” for investors. It makes stock exchanges even more important especially in transitional countries in the light of FDI as a main instument of increasing production growth.

2.3 The role of stock exchanges in transitional countries

As you see, the stock exchange markets are very important in the market organisied economies. They contribute to an efficient allocation of ressources and as a consequence to the economic growth of the country. But especially important is the development of a competitive financial system in transitional economies, such as Russia. In theese countries stock exchanges have an additional function of contributing to the transformation process from a plan- to a market economy.^[10] For transitional countries the allocation functions of stock exchanges means the accellerating privatisation, the structuring of the companies, influx of foreign investments used for the expanding of production capacities as well as solution of “inherited weacknesses of banking systems”.^[11] The priority position of this key function in comparision with informational and liquidity functions developed in late 90ies in Russia.^[12]

At the time the transitional economies are close to create the institutionall frames for the functioning capital markets, the stock exchanges of developed countries are marked by enduring growth and structural changes.^[13] That is why they have a decided superiority in terms of time and expierence. The basic features of stock exchange markets in the transitional countries are a low level of capitalisation, weak connection of the stock market with the real sectors and its insignificant role for the financing of investments in the production sector as well as unsufficient transparency of the market.^[14]

2.4 The assessment of economic efficiency of stock exchange

There exist a lot of attempts in the financial literature to assess the development level of financial systems and stock exchanges in a country by means of different quantitative and qualitative criterias.^[15] In this assignment I will use the catalog of criterias developed by Rudolph an Röhrl in their work and later I will modify it for the Russian stock exchange market.

Röhrl devides all criterias in primarly and secondary. Therefore, the high liquidity and low transaction costs are the main criterias to assess the organisational efficiency of stock exchanges, as you can see in following table.

[...]

^[1] Mirkin,Y.1, p. 4

^[2] Röhrl, Heiner: Börsenwettbewerb, p.17 ( „Eine Börse ist ein Marktbetrieb, der für den Handel von standardisierten Wertpapieren standardisierte Transaktionsprozesse anbietet.“

^[3] Prihodko, p.188; Lalin, p.84

^[4] Prihodko, p.37

^[5] Federal codex

^[6] Prihodko, p.49

^[7] Berdnikova, Т, p. 16.

^[8] Burenin, p.12, Haritonova, K., p.12 f.

^[9] Mirkin,Y. 3, p. 106

^[10] Walter, K., p.1

^[11] Walter, p. 45

^[12] Mirkin, Y. 1 p. 50

^[13] Walter,K., p. 3

^[14] Kozlov, N., p.62

^[15] Walter,K., p.47