FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT APRIL 2009
NASDAQ OMX
Focus on market maturity for long term
growth
Peter de Verdier
Vice President, NASDAQ OMX Advisory Services
Creating powerful partnerships
During most of 2008 markets across the
globe were in high growth mode. Market
activity steadily increased, and indices moved
to new heights. Looking to diversify, investors
increased their cross-border holdings, despite
being less knowledgeable about foreign
markets. The international flow of capital
forced mutual fund managers to learn about
different economies and new ways to trade
and settle. Pressure mounted to even out
differences among markets.
Then, as the financial crisis hit, a sea change
occurred. Investors quickly became risk-
averse and many started pulling out of
smaller and less developed markets. In many
cases, budding efforts by these markets to
become more international were abandoned.
While this may be a natural response to a
sudden drop in foreign investments, it may
not be the best response. Rather, aiming for
market maturity may well be the best way to
faster regain volumes, prepare for future
growth, and decrease perceived risk.
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The Market Maturity model shown below is a
generic tool that can also be applied to
financial markets. In the first phase of a
country’s development, the focus is on
delivering the necessary conditions to sustain
a financial market. There has to be laws to
protect private ownership, courts to uphold
the laws and police or other functions to
enforce court rulings. Similarly, the market
needs basic infrastructure, capital markets
laws, a regulator to oversee the market, and a
surveillance function to ensure a fair and
orderly market. Usually an OTC bond market
is developed in parallel to a cash equity
market. The government often supports this
model by issuing tradable treasury securities
and privatizing through initial public offerings.
As the market develops, quality increases and
volumes tend to grow faster than the
surrounding economy. Quality comes in many
forms. Stakeholders form lobbying bodies,
e.g., a trader association or an issuer
organization. These bodies have opinions on
market development and drive changes to
increase investor attractiveness. By
encouraging the creation of stakeholder
bodies, market operators can gain access to
valuable advice that is hard to get in one-on-
one meetings with stakeholders.
Corporate governance of listed entities is
another important quality measure. If a single
shareholder or an organized group effectively
controls a listed entity, the rights of other
shareholders could be put at risk. Transparent
criteria for initial and continued listing,
periodic disclosure of the company’s recent
financial performance and independent
outside audit as well as disclosure of its
financial statements are some of the key tools
that serve to improve governance and protect
shareholders.
Overall, market transparency is a key focus to
increase quality. To ensure market fairness,
corporate news should be released in a
manner that does not unfairly disadvantage
any group of investors. Rules that govern
trading by company insiders may also be
necessary, as well as effective trading
surveillance and monitoring of issuer
compliance with continued listing standards.