Financial markets and the Prague Stock Exchange

Financial markets are a broad notion to which several concepts can be traced. A financial market is defined as the place where you can sell or buy financial instruments (shares, bonds, derivatives, fund shares, etc..). Nowadays, financial markets are no longer physical locations, but digital platforms also referred to as trading venues. Here there is the meeting point of the purchase and sale orders of financial instruments entered into the system electronically.

How many and what types of financial markets are there?

The financial markets are multiple and are divided according to: the nature of the object of the exchanges (we will have different markets with peculiar financial assets and subject to specific supervisory authorities), the different maturity of the financial instruments and by virtue of the time when the securities are traded with respect to their issue. With regard to this last distinction, we can recall:

-the primary market: where newly issued financial instruments are traded, the investor buys securities that have never been traded before.
-the secondary market: “place” where securities already issued on the primary financial market are traded.

Each security is therefore born on the primary financial market and after its issue and subsequent placement passes definitively to the secondary market.

Financial markets in the Czech Republic

In the Czech Republic financial markets are divided into:

• currency market (foreign exchange market), which provides information on:
  • market exchange rates and exchange rates of other currencies;
  • transactions in foreign currency;
  • the volume and structure of the international reserves of Česká Národní Banka (Czech National Bank CNB). 

• money market, which provides information on:
  • the interest rates set by the CNB;
  • the volume of money market transactions and the current liquidity of the banking sector;
  • the CNB’s open market  operations;
  • and the parameters of re-term transactions that provide liquidity. 

• government bond market, defined as a subcategory that contains:
  • a timetable for emissions;
  • the results of short-medium and long term bond auctions;
  • the lists of participants, emissions and the specific rules of the auctions.

Financial markets also include the stock exchange, which is defined as a regulated financial market where transferable securities (also known as securities) and foreign currencies are traded.  Transferable securities in turn are divided into equity securities (shares), debt securities (bonds) and derivative instruments (forwards, futures, options and  SWAP). Each of these securities corresponds to a precise market, understood in a broad sense:

• the securities market or securities market can be divided into:
  • share market;
  • bond market;
  • derivatives market and its sub-categories.

If the market is managed by a regulated intermediary, the market is called a “public market”, otherwise it is referred to as a “private market“.

The aim of the stock exchange is to bring together the orders to buy and sell of investors who wish to increase the value of their funds or companies interested in acquiring new capital. The prices of financial instruments traded within the stock exchange are determined according to the law of supply and demand. Investors place their orders through financial traders also known as traders, who carry out trading operations (exchange) as stock exchange operators. The Stock Exchange operating in the Czech Republic is the Prague Stock Exchange (PSE), which is the largest and oldest institution of the securities market in the Czech Republic since 1871.

PSE historical background

Attempts to establish a stock exchange date back to the reign of Empress Maria Theresa of Habsburg, remembered among the various honors as the first (and only) woman of the House of Austria to inherit the Government of the vast possessions of the Habsburg monarchy. The goal was only achieved in 1871 when both securities and commodities (“undifferentiated good”) were traded on the Prague Exchange. The Prague Stock Exchange experienced important development during the period between the two world wars, so much that it surpassed the Vienna Stock Exchange in terms of importance. The outbreak of the Second World War, however, led to an interruption of this expansion, as a consequence there was the interruption of the exchanges for more than 50 years. After this prolonged period of inactivity, the stock exchange resumed its vigor and liveliness in trading only after the fall of Communism. On April 6, 1993, the Prague Stock Exchange began to write its own pages of modern history.

The PSE today

PSE is a member of the CEE Stock Exchange Group (CEESEG), which includes three other Central European stock exchanges: the Vienna Stock Exchange, the Budapest Stock Exchange and the Ljubljana Stock Exchange. The group entered the international financial markets as a new and important player in September 2009 to become currently the largest trading group in Central and Eastern Europe. PSE is managed by Burza cenných papírů Praha, a.s. (Prague Stock Exchange),  a subsidiary of CEESEG AG (Central and Eastern Europe Stock Exchange Group), which is located in Vienna. The PSE evaluates initial public tender applications and is responsible for the listing process. Trading at PSE is carried out through traders authorized to trade who are also members of the stock exchange. If a common investor decides to invest on the Stock Exchange, he should get in touch with a member of the Stock Exchange itself.

PSE activities

The PSE manages 3 listing boards, namely:

• prime market, considered an elitist market within which the offer and subsequent subscription of so-called blue-chip shares take place. These refer to large companies, which enjoy an excellent reputation. They are typically very large, equipped with a transparent structure, an accounting system based on international accounting standards and professional and ambitious management. The primary market of the PSE is responsible for trading the most important issues of shares of Czech or foreign companies. Admission to the primary market allows companies to acquire not only funds by subscribing to their shares but also a prominent position in the reference market. The Listing Exchange Committee, the body responsible for deciding whether or not to admit the applicant to trading within that market, has full discretion in approving or rejecting the application. The requirements established for the correct listing of securities are binding and mandatory. Their violation entails financial and non-pecuniary sanctions, including exclusion from trading for the shares concerned;
• Standard market, like the primary market, is a market intended for trading the shares of large and prestigious Czech and foreign companies. Unlike the first type of market, this section allows the trading of shares even without the consent of the issuer if they have already been traded on another regulated market in the EU. Admission to the standard market gives the company greater importance, becoming more attractive and interesting not only for potential investors, but also for its current clients and the general public. This market also offers the opportunity to trade attractive shares of foreign companies in the Czech Republic even without the direct involvement of the issuer itself. As with the primary market, the Exchange CEO in charge of deciding whether or not to admit the applicant to trading within that market, has full discretion in approving or rejecting the application. The requirements established for the correct listing of securities are binding and mandatory. Their violation entails financial and non-pecuniary sanctions, including exclusion from trading for the shares concerned;
• Free market, which represents a segment of the market of investment instruments (Multilateral Trading Facility MTF), organized by the Stock Exchange pursuant to Articles 69 et seq. of the Law on Capital Market Commitments. This market is open to investment instruments admitted to trading at the request of the issuer but also to instruments traded on other stock exchanges that are admitted to trading without the issuer’s consent. The investment instruments traded on the free market are:

1. actions;
2. bonds;
3. ETFs;
4. Investment certificates;
5. Warrants

The admission of an investment instrument within the free market is subject to the binding judgment of the CEO of  the stocks exchange, who decides whether to admit or reject the request within 10 days of its submission;

• START market, designed for small and medium-sized enterprises SME. This type of market is ideal for small and medium-sized enterprises looking to acquire new capital. The added value of this market, compared to other similar European markets, is the low expected cost for issuers. The companies present within the start market have simpler accounting and information prospectuses, use national accounting standards and have their registered office in the Czech Republic. The requirements for the listing of securities within the PSE are specified by the precise rules established for the Start As with previous markets, continued compliance with these conditions is binding on companies and their violation may result in financial penalties and not for the issuers themselves. Investors attracted to this segment are of multiple nature, in particular: wealthy individuals with a high-risk tolerance, business angels, private equity, venture capital investors and institutional investors (pension funds/equity funds). Twice a year, the Prague Stock Exchange organizes investor relations days, also called  START days. These meetings allow issuers already present in that market to present their business results, meet and answer any questions from investors. It is also an opportunity for potential companies wishing to enter the START market to present themselves to potential investors. The Exchange’s CEO in charge of deciding whether or not to admit the applicant to trading within that market, has full discretion in approving or rejecting the application. Unlike previous markets, the latter is regulated only by the Stock Exchange and its operating rules are defined in such a way as to simultaneously guarantee the needs of investors and sufficient liquidity, a key element for investors. The requirements laid down for the correct listing of securities are binding and obligatory. Also in this case the violation involves financial and  non-pecuniary sanctions, including exclusion from trading for the shares concerned.

Surveillance of the Czech financial market

In the Czech Republic, the supervisory authority of the financial markets is the Czech National Bank,  a public body responsible for regulating the stock market and the securities market by statute. The legal framework of the Czech securities market is therefore administered by the National Bank of the Czech Republic. The Bank shall examine and approve the prospectuses of listed securities. The CBN, in detail, lays down rules to protect the stability of the banking sector, the capital market, the insurance sector and the pension scheme sector. The maintenance of financial stability is defined as one of the primary objectives of the CBN as indicated by Law no.6/1993  of the same Bank. The Czech institution defines financial stability as the situation in which such a system operates without serious dysfunctions or undesirable impacts on the present and future development of the economy as a whole, showing a high degree of resilience to shocks. The recent outbreak of the Coronavirus pandemic deserves a specific assessment, to assess the strong impact caused to the global financial markets. As with the rest of the world, the spread of COVID-19 in the Czech Republic has reduced economic activity and raised many threats to the stability of the financial system. As a natural consequence of the pandemic, the Prague PX index (official price index of the Prague Stock Exchange weighted with the most liquid stocks), suffered a rapid fall, as evidenced by the following figure:

Figure 1. Percentage change of the financial markets’ stock market indices for the countries that make up the Visegrad group, from 2 March 2020 to 24 March 2020.

The period considered is relevant, as it considers the time frame in which stock prices around the world have experienced the largest decreases in value. As evidenced by the figure, the Prague PX index reached its lowest level on March 18, 2020. Following the first case of COVID-19 officially recorded by the country (dated March 1, 2020), the index decreased by about 43%, while the largest daily decline was about 8%. The negative results are the result of joint action both of the worsening perception of market participants regarding the future movement of prices and of the increase in the volatility of the financial products themselves. This negative period fueled investment losses in a very short period of time. The readiness of the various international governments to introduce unprecedented measures has countered the negative expansion of these effects. For its part, the CNB, as guarantor of the stability of financial markets in the Czech Republic, has responded to the impacts of the pandemic with a combination of monetary policy measures and macro-prudential interventions. The National Bank intervened with:

• the reduction of interest rates;
• the modification of rematches for the provision of liquidity to the Czech banking sector; operations that have made it possible to obtain liquidity in the form of short-term credit from the ICB by certain non-bank financial institutions (insurance companies and management companies);
• extension of the range of eligible guarantees from credit institutions (banks, branches of foreign banks and credit unions) to mortgage bonds;
• prohibition on banks, insurance companies and management companies from distributing dividends or taking any other measure which could have jeopardized the resilience of individual in the medium to long term;
• lowering the capital buffer rate for banks in order to support their ability to finance the real economy without interruption and to cover any credit risks.

The measures implemented by the CNB have been highlighted at the international level, as suggested by the analysis of the economic risk index of Oxford Economics between the period of November 2019 and May 2020. In short, the index measures the economic, financial, commercial, and market risk levels of 164 countries around the world based on periodic, typically monthly, updates and analyses. The value of the index ranges from 0 to a maximum of 10, where the minimum represents the absence of economic risk for the country, while the highest value represents the highest level of desirable risk. Table 1 shows that the level of risk recorded in the Visegrad countries (considered as emerging economies) remained unchanged during the period considered. The data suggest that these countries and in particular the Czech Republic should cope with the ongoing pandemic better than other countries considered in the ranking. The Czech Republic is considered one of the economies with the lowest level of risk, given its highly conservative fiscal and monetary policies, low public debt and liquid and prudent banking sector.

Table 1. Forecast assessment of the economic risk for the Visegrad Group countries for 2020.

The Bank works to ensure financial stability and the healthy functioning of the financial system in the Czech Republic. Operationally, as reported in Art. 2 of the aforementioned law, the CBN establishes the macro-prudential policy aimed at identifying, monitoring and evaluating possible risks that may compromise financial stability and in order to prevent and mitigate those risks, through the powers conferred on it, contributes to ensuring the resilience of the financial system, to the reduction of possible systemic risks and to the maintenance of financial stability as a whole. Article 2 specifies that, where necessary, the National Bank cooperates with the competent authorities for the definition of the macro-prudential policy and its obligation is to submit at least once a year to the Chamber of Deputies a report on the financial stability and the way in which it is pursued. The Czech National Bank ensures that market regulation is suitable for ensuring the following macro-objectives:

1. The correct conduct of negotiations;
2. Market transparency;
3. Investor protection.

Conclusions

Despite the historical management and operational difficulties at the financial level of the Czech Republic, the country can count on a financial market in great expansion. During the first ten days of December 2021, the Prague Stock Exchange reached an incredible theshold, reaching its highest value since 13 years. The PX index increased by 0,84% to 1.398,82 points, his maximum from September 2008. The Prague Stock Exchange manages to differentiate itself positively from several points of view: first of all, the costs to be incurred for the listing process and for the maintenance of the positions in place, which are respectively equal to 0 CZK for admission to trading on the regulated market and a percentage that fluctuates between 18-90% of annual commissions lower than other European exchanges. Secondly, the time required to list within the Start market that on average in PSE is equal to only 6 months, it is a low waiting time compared to the average period of other international stock exchanges which can also be a full year. Last but not least, the participation of international investors in the first issue listings on the Prague Stock Exchange equal to 96%, which contributes to fuel the attractiveness of the Financial Market of the Czech Republic in the international context of reference.