An offshore trading platform for central and eastern European securities is still several months away from launch – a full two years after the idea was first announced. Sceptical investors now doubt whether Newex (New Europe Exchange) can usefully add anything to existing arrangements for trading these countries’ shares.

But Erich Obersteiner, a member of Newex’s management board, is undeterred. He estimates there was a total market turnover last year of E40 billion in central and eastern European shares on local and western European exchanges. Of this, he expects Newex to capture 20% in Russia, 5% in the Czech Republic, between 1% to 2% in Hungary and just under 1% in Poland by the end of 2001.

Newex, a joint venture between German exchange Deutsche Börse and Austria’s Wiener Börse, is now due to be launched this autumn. However the original announcement of the project, known then as the Ost Börse, was made in March 1998.

Erich Obersteiner of Newex:
“We are seeking to set up the first quality offshore market for central and eastern European stocks”

A spokesperson for Newex denies that it has taken a long time for the exchange to be set up. “Back in March 1998 this was just an idea,” he says, “but the official contract between the two exchanges was only signed in January 1999. I do not think this is a long time to take over setting up an entirely new exchange.” Obersteiner will not be pinned down to a more definite start-date for the operation than “autumn”. He says that the project is at “a relatively early stage of its development. We are still setting up the infrastructure of the exchange.”

He says Newex aims to provide European institutional and retail investors with a quicker and more transparent exchange on which to trade Polish, Hungarian, Czech and Russian stocks. Newex will consider adding other quality companies from central and eastern European countries when it has been running for a couple of years. “This is a very complex project because we are seeking to set up the first quality offshore market for central and eastern European stocks,” he says.

Although fund managers question how the exchange is going to provide added value over buying central and eastern European securities in global depository receipt and American depository receipt form, Obersteiner is adamant that the project will succeed. He says that the key is the transparency, quality and liquidity of the Newex exchange, and he believes Newex has created the optimum solution to the major problem of liquidity. “Each security will have a special liquidity provider that will run a permanently open order book. Even if a buy or sell order cannot be matched at the time it will accept the order and execute it as soon as it can.”

He admits this is not as efficient as a traditional market maker system, where an immediate and firm bid and offer price are offered, but there are not enough brokers willing to act as market makers for most of these stocks to make that system feasible. “Not many people are prepared to take that kind of risk. This is the second best option,” he says. The exchange will operate on Deutsche Börse’s Xetra electronic trading platform.
Obersteiner is keen to emphasise the quality of stocks that will be traded on Newex. “We will start by listing a few dozen companies. We do not want masses of stocks – we want quality stocks. Our transparency requirements are very strict and are actually in excess of what is required under Austrian law.”

He estimates that the exchange will be made up of one-third retail and two-thirds institutional investors. “There has been a lot of additional interest in Poland, Hungary and the Czech Republic because of European Union accession talks,” he says.