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.
The Grand Hall is noted for its fine acoustics, second only in the city to those of the Colón theatre, the opera house. These days, however, the only sound heard there is the click of chess pieces being moved and coffee cups being lifted since the trading floor has been shifted into the modern building next door to allow electronic trading to be introduced.
The problem is that the chess players, many of them retired brokers who talk fondly of the era of prices marked with chalk on a blackboard, still influence how the bolsa is run. Many of them think that Argentine companies should not have been sold to foreigners in the first place and blame this “mistake” for the de-listings. To them the internet is a toy their grandchildren play with and the challenge for the bolsa is to grab back the trade stolen from the little firms by foreign banks.
The retired brokers are not the only ones holding up progress. The bolsa is run as a non-profit-making club and its 6,000-or-so members pay a fixed monthly membership fee. Almost half are over 60 and retired and many have never had anything to do with stockbroking. They are grain merchants, cattle exporters, coffee traders and so on. Yet they get to vote in (about 2,000 usually bother) the board and president that run the exchange. As a result only six or seven of the 30-strong board are brokers.
Of those bolsa members who are involved in stockbroking about 1,000 are employees rather than owners of firms. They are the floor traders whose jobs are threatened by modernization and will oppose it in every way. So the views of the owners of the 140 broking firms are being drowned out by those of their workers. In Buenos Aires, the institution that most typifies the capitalist system, the equity market, is being run according to socialist principles.
However, the owners of the brokerages are hardly more progressive even when given the opportunity. In Argentina the stock exchange is run not by one body but by two – the Bolsa de Comercio de Buenos Aires as well as the Mercado de Valores de Buenos Aires (the Merval). The bolsa is like a chamber of commerce embracing many activities, hence the diversified membership, from which the Merval split away in 1929. While the bolsa looks after corporate matters such as listing requirements, the Merval runs, regulates and guarantees trading, and is responsible for clearing and settlement. In short, it carries out functions related to the brokers while the bolsa deals with companies. The Merval is a profit-oriented limited company and its shares or seats are owned by the brokers.
In Argentina the top 10 brokers account for half market turnover so there are dozens of smaller firms with less than 1% each. These little outfits worry about complete domination by the major foreign players – Santander, Merrill Lynch, Raymond James, JP Morgan and ABN Amro – and can be as conservative as the bolsa’s membership in resisting change. It was they who knocked down proposals to bring in Boston Consulting.
The president of the Merval is Norberto Gysin, a traditional broker but regarded by the banks as a reformer and someone they can work with. His office is in the modern building next door to the old exchange and is only slightly less plush than Peña’s. Gysin says that “dramatic change is needed” but he admits that modernizing the exchange will be difficult. Since the defeat of its consultancy proposal the board has been inviting in speakers to talk to shareholders and explain the benefits of reform. Shareholders’ minds have to be changed before the exchange can go ahead with any large-scale restructuring such as merging the two institutions and listing the resulting company on the stock exchange or simply scaling the operation back to cut costs. The bolsa’s members would also have to agree.
“We have to rethink the whole structure of the market,” says Gysin. “We haven’t yet reached any final agreement. From the competitive side it would be better to have a single structure but from the organizational side keeping the companies and brokers’ interests separate has some advantages although it is very costly.”
The accumulated wealth of the institutions is part of the problem. The bolsa has a net worth of $100 million. The Merval has shareholder equity of $120 million, half of which is in liquid assets. Brokers who wish to throw in the towel are mindful that the equity value of their seats is $500,000, almost double the market price. They are mesmerized by the $2.1 million that state-owned Banco de la Provincia de Buenos Aires paid for a seat when conditions were better. Surely, they argue, if the exchange wants to downsize it should dip into its very deep pockets and pay them to go? The Merval does have a fund to repurchase seats and has bought back 11 at an average prices of $298,000. At this rate it would take a decade before the tiny brokers opposing reform could be eliminated. The exchange doesn’t have that long.
In the meantime the small firms eke out what living they can mostly by climbing on the backs of the large firms they claim to despise. Front-running is rampant in Buenos Aires, with traders profiting by noticing what orders the large firms are placing and then acting as self-appointed intermediaries gathering up or dumping stock and making money on the turns.
The largest broker in the market is Santander Sociedad de Bolsa, owned by Spain’s BSCH, which had a 12% share over the past six months. When Santander’s chief equity trader, Marcos Piccardo, wants to sell a large block of stock he has to be careful. Ideally he wants to match his sell order with a buy order from a local pension fund. But if he fails and the market catches on, the price will drop 5% or more as the small-fry day traders front-run him. It’s as bad when he tries to buy. Many times a small trader picks up stock and has to be taken out at a higher price.
Like most of the major traders in Buenos Aires, Piccardo feels upset at the market’s decline. “The bolsa is dominated by small brokers who are trying to protect themselves but you can’t go against the machine [of progress], you can’t just say ‘no’ as the bolsa is doing today,” says Piccardo.
Piccardo believes the split trading system is absurd for a market with only $20 million to $30 million turnover a day. Currently the market opens electronically at a leisurely 10.30 am or 11.30 am (in line with New York’s opening) and then from 2pm on some stocks can only be traded on the floor. One of Peña’s proposals for change is to lengthen hours but he could be too late with Argentina’s up and coming internet traders maybe deciding that they prefer to trade where they want and when they want.
Piccardo thinks that many of the bolsa’s actions have been designed to benefit the small traders at the expense of the large ones. “When they created Sinac [the electronic system] they said they needed to know who is bidding and offering. Now every time they see my number on the system and I put in a bid I have the small guys ahead of me,” he complains.
“We proposed having a block market with a minimum ticket of $100,000 but the exchange said ‘no’. Then last year the bolsa came out with a project to install a Bloomberg screen for every floor trader. Since 50% of their income comes from the large firms it means we would have been paying for this. The bolsa is trying to survive in a selfish way.”
Piccardo says that the market is now too expensive for day trading unless there is very high volatility. Like many he concentrates a lot on trading in ADRs, which is cheaper, and he regrets the passing of the over-the-counter market in Buenos Aires which was generating five times the volume of the ordinary market. Requiring a fixed fee rather than the 9.61 basis points currently levied on each transaction (3.61bp for the bolsa, 6.0bp for the Merval) it was a cheaper way to trade for the large houses.
The Merval was persuaded to close down the OTC market on the advice of the Argentine regulator, the Comisión Nacional de Valores, because it lacked transparency. The CNV is known to have concerns about the equity markets, including the front-running and the cumbersome structure, but is limited both in budget and powers as to what it can do. The CNV doesn’t have the power to shut down the market, only to make recommendations, although it could take stronger action if it felt that the market was unsuitable for the pension funds to trade in. So far it has taken a persuasive approach, succeeding two years ago in collapsing the three settlement periods that existed into one.
One of Gysin’s proposals for reviving the market is for the government to allow reductions in tax for listed companies and at the same time introduce a tax on dividends. He argues that the overall effect on tax revenues would be positive as more companies would be persuaded to list, but so far the government is taking a wait and see approach. Gysin also wants to hire a marketing director and to establish a strategic alliance with the São Paulo exchange in Brazil that would allow brokers to trade shares in both markets. Some of the other changes he wants to see come under the bolsa’s jurisdiction, such as removing the listing requirement that companies must have three years of audited accounts (which excludes many hi-tech companies) and reviving a board for smaller companies. The current one has not attracted a single listing.
“The Merval cannot go against what the bolsa decides because the bolsa is self-regulated and can delay things,” says Carlos Sigwald, managing director of Santander Investment in Argentina, who sits on the Merval board. “In the end the facts are going to make things change because otherwise the market is going to disappear. The market has to face up to world reality.”
Santander’s parent, Banco Santander Central Hispano, contributed to this reality in February when it announced it would buy the publicly traded shares of subsidiary Banco Rio de la Plata, one of the country’s top three banks. The aim is to delist Banco Rio from Argentina and offer BSCH shares instead.
This was also the model used by Spanish oil company Repsol with its takeover of Argentine oil company YPF last year and and is what Spanish company Telefónica is planning following its purchase of Telefónica de Argentina as announced in January. The model allows the bolsa to pretend that its market cap is growing by counting in the entire capitalization of Repsol. The reality is different. YPF was the star of Buenos Aires and the most heavily traded company but Repsol hardly trades (and on some days it doesn’t trade at all). The same is expected of Telefónica and BSCH shares.
“YPF put Argentina on the map. It was a big company in global terms and accounted for about 15% of the index. Every Latin American portfolio had to have YPF,” says Roger Heale, equity analyst with Raymond James Argentina. “It’s rather the same with Telefónica. Telefónica de Argentina was one of the preferred telecoms shares in the region and also accounts for about 15% of the index. But while Repsol/YPF is one of the biggest companies in the market, it has no liquidity and so will never get into the Merval Index [calculated on volume of shares traded and number of trades check]. This is one of the problems with foreign shares in the market.”
Peña, who in his long career has also been president of the Merval, says: “Investors need time to get used to a new share.” Other analysts say they don’t expect Argentine investors to ever be very interested in locally listed Spanish companies. “Why not buy them in Spain?” asks one.
The companies themselves are tired of seeing the equity prices of their Argentine subsidiaries slumping on account of the latest emerging-market crisis – tequila, Asia, Russia, Brazil – when the parent company’s shares in Madrid are soaring. The differential in interest rates also makes raising debt much cheaper at home. With the trend of multinationals consolidating and spinning off a particular business line (such as internet or cellular in the telecoms sector), the attractions of a listing in an emerging market are becoming less.
Another body blow to the Argentine market was when the Disco supermarket chain was bought out and de-listed by its Dutch parent Ahold last April. Lately de-listing has become an almost weekly occurrence. “There is indeed a pall of death hanging over the market,” writes strategist Chris Ecclestone in Buenos Aires Trust Company’s weekly report in January. “The current crop of leavers, Sevel, Canale, Negocios y Participaciones and Paclin Agropecuaria were joined in the last week by CEI Holdings. As the only media stock in the market, its absence will make everything just that bit duller, even though it was not a great volume trader.”
There are rumours about others de-listings, such as Banco Suquia, which was taken over last month by Banco Bisel, a unit of France’s Crédit Agricole; Astra, which is a subsidiary of YPF; and Telecom Argentina, which will be the only internet player left when CEI and Telefónica Argentina go. Banco Francés since it is owned by Spain’s BBVA is another obvious candidate.
As with other emerging markets, the small counters on the Argentine stock market are illiquid and attract relatively little interest. Ninety per cent of the trading volume is concentrated in five stocks and international investors as well as Argentine pension funds are only interested in the blue chips. It’s getting to the stage where there are insufficient suitable stocks for them to buy.
Banco Galicia, Argentina’s only major private bank that is still locally owned, and oil company Perez Companc are almost the only familiar names left. After a recently announced share swap, though, trading in Perez Companc is expected to migrate to the New York-listed ADRs and the company’s 25% weighting in the Merval index will drop significantly. ADRs are favoured over Buenos Aires listed stock because of greater liquidity and lowerer transactions costs. When YPF was listed it traded three times as much in ADRs as in normal stock.
Vast areas of the Argentine economy are not represented on the exchange. Wine, mining and tourism are flourishing areas but there are no listed stocks. With the recent departures, supermarkets and media are also left out. Argentine beer-maker Quilmes is listed in New York and Luxembourg but not Buenos Aires, apparently because it fears losing control. Currently the volume of trading in Argentine bonds is six times that in equities. There is no proper equity futures market and no OTC market, whereas there is one in bonds.
It’s small wonder that international investors have grown weary. “The Argentine market is suffering. Despite an improving economic outlook, the stock market is shrinking. Starting with YPF, and now Telefonica and Banco Rio, the market is losing its most important names,” says Todd Edwards, a New York based strategist with Spain’s BBVA. “In addition transaction costs leave the market less and less competitive. Thus declining liquidity has become a significant problem. The market needs a number of interesting IPOs but the lack of liquidity acts as a strong constraint. In the meantime, entrepreneurs with hot ideas prefer to by-pass Buenos Aires for Nasdaq.”
Gustavo Neffa, an analyst with BBV Banco Francés in Buenos Aires, says: “The stock market has never really developed. It has only became a serious market since 1993 when inflation ended. Since then there have been several big crises. The market has never really been promoted and the listing costs are high with the need to issue quarterly balance sheets. It’s cheaper to issue CP rather than raise equity.”
When the new government came to power it slapped 21% VAT (since removed) on brokerage commissions, which convinced many traders and brokers that it was against the stock market. They threatened to strike but as Ecclestone notes: “These days it would be difficult to tell if a one-hour strike was just a lull in the torpid trading.” Merval directors report that their dealings with the relevant government officials have been positive but if anyone expects strong interventionist measures they are likely to be disappointed.
Secretary of finance Daniel Marx, who used to work for Argentine investment bank Merchants Bankers Asociados, is not yet in a position to state clearly his intentions towards the equity market. But he talks at length about the importance of the consumer/investor, the need to have open capital markets, the trend to using the internet rather than a physical marketplace and the global pool of liquidity that Argentine companies can tap. It soon becomes clear that Argentina wants to become more engaged, not less, in the global economy that is blamed by some for destroying the stock market. The exchange’s stark choice is compete or die.
Marx talks about the need to integrate clearing and custody at the exchange but he also says: “We don’t want interfere.” His is more focused on the big picture. “This is an open financial market. In order to buy Argentina you don’t have to go through the stock market. You have the same confusion with Argentine bonds. They are listed here and trade here but they also trade around the world and a large percentage of the global bonds are held by Argentines. If Argentine companies go to Nasdaq, Argentine investors can buy through Nasdaq and they are doing it. Companies are going outside the [Argentine] stock market because of greater liquidity. This is also happening with fixed income. In the end you will not have a part of the world that is more or less liquid than another, you will have a global pool of liquidity that every participant can take advantage of.”
Marx cites the example of the decline of regional stock markets in the US in the early part of the last century. He says local exchanges might have gone but the city still got more brokers, more asset managers and more business than before even though the transactions were being executed in New York. “Now the New York stock exchange may be disappearing as well with Nasdaq taking over – later on, the internet will take over,” he says.
Following this line of argument what more could the government do to free up capital flows? Argentine investors are already free to invest where they like but Argentina’s newly established pension funds, the AFJPs, are not. They are restricted as to how much they can invest in equities and how much in foreign equities. A government decision to give them a freer hand would raise hackles among the conservatives at the bolsa.
“This is compulsory savings,” says Peña. “It doesn’t make sense to export capital and at the same time demand capital from the external markets. The money should stay here and play a role in developing the country.”
The irony is that Argentine pension funds are so conservatively managed that they are not currently using up their foreign equity allowance. They could benefit from the easing of some restrictions such as not being allowed to invest in foreign mutual funds or in companies without a rating on their debt, which apparently once kept them out of the equity of debt-free Microsoft. But the real challenge for the pension funds is to be more creative in their portfolio selection. As interest rates fall in Argentina and certificates of deposit and government bonds become less attractive, this may happen.
If it doesn’t, the Argentine investor is likely to take his destiny into his own hands and start trading worldwide through the internet while his pension fund manger sleeps at the wheel. “In Argentina they are going to jump the local market and go straight to the internet,” says Andres Azicri, portfolio manager with MBA Asset Management in Buenos Aires. “It doesn’t seem to matter to Argentines if they have a stock market or not.”
An equity culture has never developed in Argentina. One commentator suggests that a survey of the population would reveal that half had never heard of the stock market and the other half didn’t trust it. “It’s always been regarded as an insiders’ market,” he says.
But if investors don’t care, what about the companies? The commonly cited reasons for the failure of the Argentine stock market to attract new companies are high listing costs, lack of liquidity and low equity prices. Sigwald of Santander believes that allowing owners greater ability to retain control in secondary listings (currently they are prohibited from issuing additional class A shares with greater voting powers after the IPO) would encourage newcomers and he claims there is a pipeline of 20 companies wanting to list. Many at the bolsa, however, are resisting this change and there is always a danger of damaging minority rights in the process.
Federico Thomsen, director of equity markets at ING Barings in Argentina, believes it’s necessary to look more broadly to understand the reluctance of Argentine companies to list.
“The reason companies are not listing is not because the structure of the exchange is too complicated, it’s more the openness issue and probably tax evasion has a lot to do with it,” he says. “If you ask a small firm in Argentina why they don’t list, they would say: ‘What and open my books, are you crazy?’ If there were more pressure for listing, there would be more pressure to solve the problems.”
Ignacio Sosa, of Boston-based asset manager OneWorld Investments, takes a similar line from the investor perspective. “Argentina’s stock market is dead,” he says. “It’s the first victim of dollarization. It’s something that will happen more in Latin America because investors want more liquid flows. If you peg your currency one-to-one with a currency that belongs to the deepest equity market in the world why would you like to buy shares or list in the shallow market?” Sosa says better management of the stock exchange would only be “like rearranging the deck chairs on the Titanic”, it would not solve the problems.
Such ideas set the Argentine experience against the conventional wisdom in development institutions such as the World Bank. They have always argued that a local equity market was essential as a way of channelling savings into local industry. Now it seems as if the entire process can be handled offshore with better results. Laurence Kotlikoff, an economics professor at Boston University, argues that the World Bank is making a mistake by encouraging the development of local capital markets and trying to direct national pension funds into them. Instead they should be encouraging governments to allow their citizens and pension funds to invest where they can get the best returns, taking advantage of devaluations in their home country. They will naturally use the financial markets in countries such as the US that have a comparative advantage in providing such services. Companies will do likewise.
“If the Argentine stock market collapses completely that is not a real tragedy,” he says. “The real tragedy would be if the Argentine government were to stop Argentines investing in the US market. Why shouldn’t every Argentine have a Fidelity account so he or she can invest cheaply in index funds?”
Kotlikoff, author of a paper entitled “The World Bank’s approach and the right approach to pension reform”, says: “There is a world financial market. Countries should be investing in the world financial market. This is quadruply true of developing countries. The people in Argentina should be able to click a mouse and invest abroad.”
Theoretically, they already can do this, which is why the brokers waiting for a Merval payout will almost certainly be disappointed.
