In June of this year, a Bank of America poll found that investors are still sitting on their hands as the global economic recovery inches forward. According to the study, they are holding more cash than at any point since 2009.
Given the high levels of anxiety still present in the marketplace, one might conclude that this is perhaps not the most opportune time to establish a new stock exchange such as those that have been created in Egypt, India, and even Cambodia in recent years. But because investors aren’t finding attractive options on the exchanges that traditionally dominate the capital markets (such as the NYSE or FTSE), the door is open for these and other new exchanges to brand themselves as true players on the global economic stage.
And it isn’t just investors who may be seeking new opportunities. As the world gets smaller, big companies are looking for ways to access pools of capital that exist in regions they have yet to tap into. At the same time, these regions are home to growing companies that need to raise capital, but can’t get themselves listed on the major exchanges.
All of this means that the time is right for new and nascent exchanges to begin aggressively promoting their value propositions to investors and public companies alike. Right now, they have the chance to breed confidence; articulate their unique competitive advantages; and attract the committed, long-term investment so essential to reducing volatility and ensuring steady growth.
Confidence, competitiveness, and commitment are the "three Cs" of creating and growing an exchange today—and to develop these necessary elements of success, new exchanges need to rely on the fourth C that brings them all together: communication.
Investors—especially today’s anxious breed—need to feel that the exchange facilitating their trades is a safe and protected environment. That means fairness and transparency need to be seen as paramount concerns by all the right stakeholders, including governments, investment bankers, accountants, ratings agencies, institutional investors, and financial advisors. For a nascent exchange, this point is especially critical as new and uncharted frontiers inherently conjure fears of potential problems.
As such, a strong regulatory infrastructure needs to be implemented and articulated to the point that the dominant perception by investors and listed companies alike is one of safety and security. New exchanges often bring unfamiliar trading partners together. This is another point that ups the ante for emerging exchanges. When buyers and sellers don’t know each other, they need to know that the institution standing between them will ensure the best price, facilitate a complete transaction, and prevent any underhanded dealings.
Articulating the Competitive Advantage
Equally as important to new stock markets as fairness and transparency are concrete demonstrations of the value and advantages that come with being listed on the exchange. Most new exchanges rely heavily on local and regional companies’ participation, so there exists a need to discuss the ways that the exchange benefits local and regional interests.
At the same time, there is also a desire to attract global companies who are often listed on multiple exchanges in New York, London, Hong Kong, and other major financial hubs. As such, it is incumbent on new exchanges to highlight six key selling points:
1.Liquidity – The deeper and more liquid the market, the more companies will want to be there;
2.New capital – Companies seeking investment have a new venue in which to access capital that likely wouldn’t have been invested elsewhere;
3.Governance – Attracting market participants means promoting the experience, capital, and management capabilities of those running the exchange in order to build the needed trust;
4.Global regulatory cooperation – If companies don’t see a strong commitment to the rule of law, administered via clear and consistent legal guidelines, they will see risk rather than opportunity.
5.Technology – State of the art trading systems can help prevent the problems that derailed the high-profile IPOs of Facebook and others. They also support robust market surveillance and stand as a bulwark against hacking and cybercrimes; and
6.Listing fees – The more reasonable, the better.
Attracting Committed Investors
During the first three days of trading on the Cambodian Stock Exchange (CSX), which opened last year, the share price of a local water utility shot up 60 percent. It wasn’t long before investors looking for a quick buck began selling their stakes and pocketing the profits, significantly driving down the price. That kind of volatility can keep investors and companies on the sidelines. As such, new exchanges need to identify ways to encourage long-term investing.
That means helping global investors better understand the intricacies of the market and how they represent fertile ground for long-term growth. To some extent, this means controlling the digital conversation surrounding the regional economy. For example, a Google search performed as of this writing for the generic term "Middle East Investment" returns not one result owned by a regional exchange. That means other voices are controlling the conversation and establishing the dominant perceptions about opportunities in the region—and their messages are not always what investors would hope to hear.
Why New Exchanges Need to Succeed
By aggressively communicating the three Cs, new exchanges have the chance to benefit the global economy in two distinct ways. First, by providing large, established companies with access to investment capital that might not find its way to the NYSE, FTSE, or any of the other traditional exchanges. And second, by providing small regional companies that could never be listed on those traditional exchanges with access to the resources they need to grow, create jobs, and perhaps even become economic engines for parts of the world that sorely need them.
That’s a rising tide that lifts all boats—and one that can help motivate those global investors still sitting on the sidelines.
Richard Levick, Esq., President and CEO of LEVICK, represents countries and companies in the highest-stakes global communications matters — from the Wall Street crisis and the Gulf oil spill to Guantanamo Bay and the Catholic Church. Mr. Levick was honored for the past three years on NACD Directorship’s list of "The 100 Most Influential People in the Boardroom," and has been named to multiple professional Halls of Fame for lifetime achievement. He is the co-author of three books, including The Communicators: Leadership in the Age of Crisis, and is a regular commentator on television, in print, and on the most widely read business blogs.
[Image: Flickr user Alex]