Budapest bourse is seizing on MiFID fallout to win trades

Europe’s MiFID II law threatens to upend the global equity-research business. But Hungary’s stock exchange can take advantage of the fallout in its latest bid to boost slumping volume.From next year, when MiFID goes live, the Budapest Stock Exchange intends to pay brokerages to follow its small-cap stocks. In a post-MiFID environment where analysts may pull back even their meagre coverage of the country, the exchange says the research will encourage investors to trade.Hungary follows other exchanges – including those in Israel, Malaysia and New Zealand – that have rolled out research-sharing systems to jump start investment and boost volume. The MiFID law means banks might struggle to make money from reports on smaller or obscure firms, creating a gap that European exchanges are becoming more eager to fill, according to Edison Investment Research Ltd“Are you going to see more exchange schemes? Of course you are,” Edison’s Neil Shah, who co-wrote a report on the future of equity research, said in an interview. Shah said a 2015 push on European governments to support mid-size companies is also helping to drive the trend. Bloomberg LP, the parent of Bloomberg News, collaborated with Edison on the report.Bids are underway to win the contract – five exchange members including Hungary’s biggest lender OTP Bank and largest brokerage Concorde Securities are in the running to provide continuous secondary market quotes and research for a year for 10 companies.The MiFID rules aim to boost transparency and root out conflicts of interest by requiring that money managers pay separate fees for research and trading services when they use brokerages and other investment firms. But putting research for free on a website can probably sidestep those rules, according to Shah.“Some of the research may be available on our website,” the bourse said in an e-mail. “As market operators and exchanges, in general, fall outside the scope of MiFID II rules for investment firms, they can freely distribute these analyses directly to market participants or to the general public.”Hungary’s stock exchange is tiny, accounting for 0.04% of the world’s equity value. And the Budapest exchange is struggling. Several firms have either left or announced their intention to leave, including investment firm Plotinus and drugmaker Egis. Trading volume in the 38-stock bourse has declined after Prime Minister Viktor Orban seized pension-fund assets in 2010 to prop up state finances.The central bank took over the exchange in late 2015, saying that it will try to boost trading selling stakes of state companies and encouraging others to follow.“This is a good attempt, but only the return of institutional investors like the former private pension funds could meaningfully improve local markets in the long run,” said Janos Samu, the head of research at Concorde. Beside boosting trading, it would also encourage new listings.Concorde is already covering companies beside the four biggest firms on the exchange including realtor Duna House, printing firm Allami Nyomda and building material manufacturer Masterplast. The bourse’s tender will raise interest of Hungarian institutional and retail investors, but is unlikely to reach the threshold of foreign ones, Samu said.Other attempts to revive the domestic capital market included luring foreign companies interested in a second listing. The bourse aimed to widen the circle of potential issuers to regional firms present in Hungary and already listed elsewhere.One of the rare initial public offerings in Budapest has foundered. Waberer’s International, the biggest IPO in Hungary since 1998, has seen its trading volume decline after a scaled back offering earlier this month.