Death of a stock market

Brokers in Buenos Aires are in despair. Delistings by foreign companies of their Argentine subsidiaries have cut the market in half and trading has dwindled to a fraction. Despite this, a badly needed restructuring of the bolsa is being held up by conservatives who fear increased competition. While they argue, Argentine investors are clicking their mice and buying US mutual funds. Local companies are voting with their feet and listing on Nasdaq. By the time the traditionalists come to their senses the market could be dead.

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Small unprofitable brokers in Buenos Aires are playing a waiting game. They know their days are numbered and that they have neither the skill nor the capital to survive in the global era. When the trading floor of the exchange is finally closed, as everybody agrees it some day must be, many small firms will go with it.
But in the meantime they are in a position to hold up reform of the Argentine stock market and prevent it from responding to change. The fear is that they could be so successful that they kill the entire market in the process. Buenos Aires has been hit by a wave of delistings reducing its market capitalization by half and daily trading volumes to $20 million or $30 million from $50 million a few years back.
Globalization has also taken its toll on the market, with foreign companies busy delisting their Argentine subsidiaries (Repsol/YPF, Telefónica and BSCH/Banco Rio are the most high-profile), but the exchange's antiquated institutions have so far failed to respond. Whenever an attempt at reform is made, the old-fashioned and conservative members in the majority are able to block reforms.
What the little firms would like is for the reformers, perhaps backed by government funds, to buy them out. Their seats are currently worth a puny $300,000 yet their sights are on the $2.1 million record price a seat fetched when the market was booming. No doubt they would settle for something around $1 million. With 232 seats it would require a budget of $200 million to fix the problem.

The waiting brokers may be unlucky. Standing against the market used to be rewarded with government backing in Argentina, but things have changed. Ministers no longer consider it part of their job to defend national institutions that are inefficient or badly run. Their instincts are to deregulate not to protect and to leave private institutions at the mercy of competition. In this case competition comes from more efficient stock markets elsewhere, such as in New York where many Argentine companies list American Depositary Receipts (ADRs).
International investors don't care much either. They declare that Brazil and Mexico are the only Latin markets big and liquid enough to attract their attention and Argentina is no longer on their radar screens. Even though Argentina's $300 billion economy is on a par with Mexico's and is the third largest in Latin America, the stock market capitalization to GDP ratio has fallen from a not very impressive 16% to a paltry 8%. Investors say that Chile, with an economy a quarter the size of Argentina's, could soon have the more important stock market.
Argentine investors are only just starting to take more interest in equities. Fund managers say that as their enthusiasm increases they may be tempted to foreign markets rather than their own. They will go straight from nothing to internet investing, skipping out local buying by conventional methods.
On the supply side, things are as grim. Argentine companies have not been attracted to list to fill the gap left by the departing foreigners. Family-run, these companies balk at losing control and opening up their books, fearing the attention of the tax authorities. New hi-tech companies that want to list, such as El Sitio and Impsat Fiber Networks, are going to Nasdaq where the regulations are less cumbersome and they can raise more money.
With no demand and no supply, the Buenos Aires bolsa is in line to become the first stock exchange to be killed off by globalization. Only fast and drastic action can stop it going the way of the dinosaur and even that might not be enough. Yet in this crisis situation Argentina's stock market is hamstrung by a peculiar management structure that leads to infighting, and by traders who live off the backs of the big firms rather than create their own business and who think that going on strike is a sensible solution to problems. There is also the overhang of the bolsa's past splendour. Essential issues such as the easing of listing requirements are competing for management time with preoccupations with preservation of the historic building and the care of its grandiose decor and art collection.
An attempt to bring in Boston Consulting Group to advise on a restructuring was defeated by conservatives and proposals to appoint a marketing director are still on the drawing board. The president of the Bolsa de Comercio de Buenos Aires is 81-year-old Juan Bautista Peña, a traditional Argentine broker who was elected by floor traders in the belief (correct so far) that he would preserve the floor. Similarly Boston Consulting's services were rejected because of concerns that the consultant would recommend closing it. Currently the exchange has a split system with both electronic and floor trading.
Peña is a charming man and quite sprightly for his age. He doesn't work mornings but compensates by working evenings. He is on his third term as president and carries the accolade of having been both the bolsa's youngest president (when aged 40) and the oldest. His office resembles a salon of the palace of Versailles with period furniture and gold inlay on the walls. Peña boasts that he is responsible for bringing in 80% of the décor, including an original tapestry from Versailles, hung close by the bolsa's sweeping staircase, which was purchased legitimately in Spain but which the French government would doubtless be pleased to see returned. Peña is surrounded by support staff. During our interview he wants a smoke and buzzes his secretary. She interrupts her work to walk the length of his cavernous office to deliver a single cigarette.
"Up until now tradition has been a strong asset of the exchange," says Peña but he agrees that its members "are facing many challenges and will need to make changes".
To most observers of Buenos Aires' decline this is a classic understatement. The bolsa is screaming out for radical changes. The big questions are whether Peña, affable as he is, is really the man to introduce them and, if not, whether the bolsa as an institution is capable of electing someone who is? Peña's term expires in April. A stroll among the columns of the bolsa's Grand Hall, which dates from 1916 (the exchange itself was founded in 1845), would quickly lead one to the conclusion that the answer to both questions is no.
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Death of a stock market

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