The Budapest Stock Exchange: record-breaking year: 1996-1997
The last two years have seen an abundance of new records and significant developments that lead the seven-year-old Budapest Stock Exchange (BSE) into the future. New markets and products, all-time high market prices and outstanding international recognition have featured among the achievements of the BSE:
* the Budapest Stock Exchange recorded the largest increase in market prices in the world in 1996, and produced a net return of 135 to 136% in dollar terms;
* the BSE has been entered on the London Stock Exchange list of approved exchanges;
* the 1996 turnover in equities was double that in the period between 1990 and 1995;
* by July 1997, the growth in equity turnover topped the above record, and the current part of 1997 has seen turnover in equities surpass the same period last year by a factor of five;
* capitalization reached $14.8 billion by late 1996, while July 1997 surpassed that record value by an additional increase of $2.95 billion;
* following a record value of 4134.31 points in late 1996, the Budapest Stock Index (BUX) closed at 7234.45 points in late August 1997, reflecting the positive expectations of domestic and foreign investors and the related dynamic growth in turnover;
* the Central European Stock Index (CESI), which the Budapest Stock Exchange introduced in and has published since 1996, reflects price movements in the five capital markets of the region: Budapest, Prague, Ljubljana, Bratislava and Warsaw;
* turnover at the end of July 1997 on the futures market, celebrating its second anniversary, topped the value at the end of the first seven months of 1996 by 356%.
Two years of trading in futures, options market in the making
Hungary has also proved the derivatives market to be the section of the capital market capable of the most dynamic development. This is due on the one hand to the specificity of that market: high gearing, liquidity and opportunities for more sophisticated risk management as compared to OTC markets, and to the almost unlimited number of products eligible for listing. Besides the proper selection of the underlying product, success depends on the activity of the market participants and their propensity to conclude deals. The standardised futures market of the Budapest Stock Exchange launched its operations on March 31 1995 and is known as one of the safest markets in central and eastern Europe at present. Trading started in four products: three-month discount T-bills, the Budapest Stock Index (BUX), and the dollar versus the forint and the Deutschmark versus the forint exchange rate. The Ecu contract was introduced in November when the Ecu was part of the currency basket of the National Bank of Hungary. Perpetual market development has brought new contracts such as the 12-month discount T-bills, one and three month Bubor (Budapest Interbank Offered Rate), and two new contract months (18 and 24 months) have been added to the available maturities.
While 1995 is seen as the year of successful market launch, 1996 is regarded as the year of stabilization and new improvements. 1997 completes the cycle with outstanding records in turnover and market price hikes.
The system of trading in futures
Trading is conducted in open outcry and is divided into three stages for each product: an opening, a free and a closing period. When the market opened, the trading process started with the submission of orders on deal cards. Orders were entered into the order book by specialists. As liquidity grew and volume increased orders have been entered directly by brokers through an order-entry screen. An electronic system was introduced to support open outcry in June 1997. Brokers enter electronic orders in the opening and closing periods, followed by open outcry trading in the free period when orders are entered by administrative staff employed by brokers.
Specialist system
The introduction of what is known as the specialist system was a prerequisite to launching the market.
Essentially, specialists agree to quote two-way prices for a product, handling an order book under an agreement with the exchange. The commitment is similar to that assumed by NYSE specialists. The major terms of the agreement are public, hence principals may always be certain that there will be in the market at least a single price and a minimum order quantity quoted by the specialist at which they may open or close futures positions. Agreements specify a maximum spread and the related minimum order quantity for each maturity of a contract, which the specialist has to maintain continuously. BSE member firms have to tender for being granted the specialist status.
Improvements on the cash and futures markets
Total market turnover on the Budapest Stock Exchange in 1997 so far has been six times higher than in the first seven months of 1996. By the end of the first seven months of the year turnover reached $13.6 billion in contrast with $ 2.1 billion at the end of July last year.
As part of the total, turnover in equities and futures this year jumped 504% and 426% respective to the value recorded for the first seven months of 1996. The futures market has proven capable of extreme dynamism in responding to market tendencies, although it has only completed its second year of operation.
Since the launch of trading in futures, trades have been concluded continuously in each contract. At half a billion forints, average daily turnover jumped substantially after early 1996, only to level at around Ft1 billion in the late months of 1997. The daily average continued to increase to reach $11.5 million after robust growth and eventually rose to $20 million in July and August.
Turnover on the foreign exchange market of the BSE represented 45% of total turnover in the month the market section opened, and the ratio has increased to 58% of the total turnover of 1996.
The amount of foreign exchange transacted in the first half of 1997 surpassed $290 million (single accounting), which represented one-fifth of total turnover in futures. The relatively low ratio of currencies is due to the dramatic boom of transactions in BUX, the most successful futures product.
The licence granted by the National Bank of Hungary in late 1996 to foreign investors to trade BUX on the exchange came as a further significant milestone in the development of that market section.
Summing up, the futures market had shown two years of unbroken development when it completed the first two years of operation in July 1997:
* monthly turnover hovered around $451 million (with average monthly turnover at $265 million), coupled with
* 7377 trades a month and open interest at $250 million;
* the number of contracts traded in July was 97,827, almost half of which (47% or 46,251) was made up by open position contracts;
* turnover in the futures market is more than two-thirds that of the equities market.
The two markets, futures and equities, have been closely linked as far as improvements in recent years are concerned. With monthly turnover at $319 million in July 1997, BUX has become the driving force behind the present turnover in futures.
Future development trends
As envisaged in the strategy of the Budapest Stock Exchange, three sections have been established, with the market of derivatives representing a completely independent section. This is expected to incorporate markets for both futures and standardized options according to the strategy. The BSE aims at creating a derivatives market capable of development and of concentrating liquidity to meet the requirements of both Hungary and central Europe. The exchange sees the need to make this market attractive for brokers, bankers, fund managers and corporate financial managers and for individual and institutional investors as well. This will allow the joint and harmonious development of domestic allocation systems and will ensure continuous international recognition for the Hungarian capital market.
The present objective in developing the derivatives market of the exchange includes improvements to the existing futures market and the establishment of a standardised options market. The latter is scheduled to open in early 1998, and faced with the success of the futures market, which by now has become an inseparable part of the Stock Exchange, options market participants expect interest of similar magnitude. Early on, trading will be conducted in open outcry. Products to be listed will include options on individual equities and BUX. The Budapest Stock Exchange works on this priority project in close co-operation with KELER Rt., the Hungarian clearing house, where a unified system of clearing and settlement for derivatives is being implemented.
The next top-priority development, encompassing all the markets, includes the implementation of an integrated, electronic multi-market trading system, which will lay the foundations for long-term development (of services) at the BSE. With the implementation of the integrated multi-market trading system, a fully electronic form of trading, independent of time and distance, will take shape for both the cash and the derivatives markets, thereby allowing Hungarian and foreign investors to manage their investments in the heart of central Europe in line with international standards and safeguards.
