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jul jul jul jul jul jul oct oct oct oct oct oct jan oct jan jan jan jan jan jan feb apr feb apr feb apr feb apr feb apr feb apr jun jun jun jun jun jun sep sep sep sep sep sep sep dec dec dec dec dec dec dec aug aug aug aug aug aug aug nov nov nov nov nov nov nov mar mar mar mar mar mar may may may may may may RUSSIAN ECONOMY IN trends and outlooks the rise in the proportion of public structures operating therein. The finding is proved by data in Fig. 13, which comprises information of the dynamic of the Herfindahl-Hirschman Index (HHI)1 with regard to turnover at the MICEX-RTS securities market between January and January 2012. According to FAS, the market appears low concentrated with the value of HHI being below 800, moderately concentrated in the event 800 < HHI < 1,800, and highly concentrated with HHI above 1,8002. Throughout 2011, HHI with respect to transactions on the major MICEX-RTS stock market was steadily being at a level in the region of 500.

2 2 1 1 2005 2006 2007 2008 2009 2010 2011 Equities Corporate bonds Regional and municipal bonds Source: calculated by the MICEX-RTS data.

Fig. 13. Herfindahl-Hirschman Index by Volume of Secondary Stock Exchange Trading on the Major MICEX-RTS Market (All the Regimes) Fig. 14 comprises data on the proportion held by Top 7 brokerages in the overall number of registered and active clients3 of participants in stock trading at the Major Market Section at SE MICEX. During 20102011, the said share in both indexes has been soaring steadily and, as of December 2011 hit 65%.

The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers.

The HHI number can range from close to zero to 10,000. The HHI is expressed as: HHI = (D1) 2 + (D2) 2 +... + + (Dm) 2, where Di the market share of i- participant expressed in percent; i = 1, 2,..., m.

See item 2.6.4. of the Methodological Guidelines on the procedure of conduct of analysis and assessment of the state of the competition environment on the market for financial services as approbated by Executive Order of the Anti-Monopoly Ministry of RF of 31.03.2003 No. 86.

According to the MICEX-RTS rules, a client who completes at least one deal a month at the SE MICEX qualifies for the active client status.

jul jul jul jul jul jul oct jan oct jan oct jan oct jan oct jan oct jan oct jan feb apr feb apr feb apr feb apr feb apr feb apr jun jun jun jun jun jun sep sep sep sep sep sep sep dec dec dec dec dec dec dec aug aug aug aug aug aug aug nov nov nov nov nov nov nov mar mar mar mar mar mar may may may may may may Section Financial Markets and Financial Institutions 2006 2007 2008 2009 2010 As % of registered clients As % of active clients Source: calculated by the MICEX-RTS data Fig. 14. The Share of Top 7 brokerages in Clients Assets, as % Fig. 15 provides reference to the change in the structure of transactions with equities at MICEX-RTS. The data exposes existence of a tendency to post-crisis recovery of the proportion of REPO deals in the structure of market equity transactions. By using REPO deals on the stock market, brokerages, as a rule, attract short-term borrowed resources to carry out a subsequent marginal lending to their clients. In January 2012, the proportion of REPO deals hit 72.8% of the volume of trading in the major market section of JSC MICEX-RTS, thus outstripping the 69.9% pre-crisis (September 2007) record-breaking level. The expansion of the proportion of REPO transactions evidences renewal of marginal lending of securities trading.

This, on the one hand, means that investors are getting increasingly keen on the market for risky assets, while on the other hand, exhibits growing risks of speculative activity of the Russian equity market. The data on the correlation between market transactions and REPO ones are of interest because they allow an indirect assessment of the degree of advancement of marginal transactions on the stock market. The fact of the matter is using REPO deals on the exchange market for equities, participants in the trading obtain resources for marginal lending. An increase in the proportion of REPO transactions means a surge in the volumes of marginal loans to strike deals under the market regime. Data in Fig. 15 show that the period between 2010 and 2011 saw volumes of marginal lending be on the upsurge, even despite the fact that equity prices were falling in 2011, which should have lowered the need in marginal loans, which are used, as a rule, to implement trading strategies on the bullish market.

A critical aspect of advancement of the stock exchange market is the growing popularity of short-term and, primarily, high-frequency, trading, and deployment of trading robots. This is evidenced by outcomes of The Best Private Investor contests RTS and MICEX ran separately in 2010 and jointly, as MICEX-RTS, in 2011. It was traders who deployed trading robots who won the contests. According to the Russian exchanges data quoted by Kommersant daily, up to 90% of stock market orders and 50% of turnovers on the RTS FORTS spot market fall on robots; on the MICEXs spot market, hyper-active trading robots hold 45% of orders and 11-13% of trading volumes. Meanwhile, 95% of the said orders at MICEX are sub jul jul jul jul jul jan oct jan oct jan oct jan oct jan oct apr jun apr jun apr jun apr jun apr jun feb feb feb feb feb sep sep sep sep sep dec dec dec dec dec dec aug aug aug aug aug nov nov nov nov nov mar mar mar mar mar may may may may may RUSSIAN ECONOMY IN trends and outlooks sequently called off with no deals stricken1 in their wake. In March 2011, MICEX kept on attempting to regulate trading robots operations. Since 1 March 2011, the exchange set up a minimum commission fee of Rb 0.14 per transaction; plus, its management established requirements to a minimum size of the lot with regard to stocks and shares in an amount of no less than Rb 1,000, which should result in consolidation of most lots on stock and shares issues2. The measures aim at encouraging large-scale deals and minimizing the number those not charged a commission fee.

11,34,69,72,79,62,27,26,2005 2006 2007 2008 2009 2010 2011 Auction (market) regime REPO transaction regime Negotiated transactions regime Source: calculated by the MICEX-RTS data Fig. 15. Structure of Equity Transactions on the main MICEX-RTS Market, as % Fig. 16 displays data on the number of transactions and an average size of an individual transaction in the market (anonymous) regime of stock trading at MICEX. The data show that several recent years have witnessed a steady tendency to the rise in the number of such transactions vis--vis a notable dimunition in their volumes. In the past three years, the average monthly number of transactions increased from 6.8m in December 2008 up to 10.6m in February 2011, or by 55.9%. Meanwhile, the average volume of market exchange equity transactions was down notably, despite the continuous process of stock quotations recovery. In September 2009, the average amount of the equity transaction in the said trading regime at MICEX was Rb 145,200, while in February 2011 Rb 117,300 or down 19.2%. The rise of the algorithmic trading manifests itself, in the first place, in an increase in the flow of orders in the trading system. However, in 2010-11, the amount of market equity transactions discon Smorodskaya P. MICEX took on robots: the trading is distanced from automats. Kommersant, 20 July 2010.

Trifonov . MICEX is not up to nickeling-and-diming. Vedomosti, 8 February 2011.

jul jul jul jul jul jul jul jan jan jan jan jan jan jan jan oct oct oct oct oct oct oct feb apr jun feb apr jun feb apr jun feb apr jun feb apr jun feb apr jun feb apr jun sep sep sep sep sep sep sep dec dec dec dec dec dec dec aug aug aug aug aug aug aug nov nov nov nov nov nov nov mar mar mar mar mar mar mar may may may may may may may Section Financial Markets and Financial Institutions tinued plummeting, which may be ascribed to private investors losing appetite for highfrequency trading against the background of the stagnating inflow of brokerages new active clients.

400 16 000 350 14 000 300 12 000 250 10 000 200 8 000 150 6 000 100 4 000 50 2 000 0 2005 2006 2007 2008 2009 2010 2011 Value of the deal, Rb Thos. Value of the deal, Rb Thos.

Source: calculated by the MICEX-RTS data.

Fig. 16. Market Equity Transactions on the MICEX-RTS Main market With its new Head in office in 2011, FSFM adjusted its requirements to capital adequacy ratio of professional operators on the securities market. On 30 July 2009, the agency approved an Executive Order regarding modifications introduced in capital adequacy standards for professional participants in the securities market, as well as managing companies of investment funds, mutual funds and non-government pension funds. In compliance with the document, capital adequacy rates were raised for professional participants in the security market who exercise:

- brokerage and securities trust management from Rb 10mn up to Rb 35mn effective since 1 July 2010 and further up to Rb 50mn since 1 July 2011;

- dealer operations from Rb 5mn up to Rb 35mn effective since 1 July 2010 and further up to Rb 50mn since 1 July 2011;

- depository operations (except for clearing depository) from Rb 40mn up to Rb 60mn effective since 1 July 2010 and further up to Rb 80mn since 1 July 2011;

- operations on running registers of owners of registered securities from Rb 10mn up to Rb 100mn effective since 1 July 2010 and further up to Rb 150mn since 1 July 2011.

Against the background of the discontinuation of expansion of investment and managing companies client bases, the absence of a real progress with adoption of tax measures to encourage the residents long-term investments, the current concentration of financial services in the hands of a narrow circle of participants represented by state-owned banks and companies, the measure in question could have resulted in a mass exodus of brokers, dealers, trust and pooled investment managers. The decision on raising the standards since 1 July 2011 was abrogated, and the standard rates were kept at the level effective as of 1 July 2010.

Deals Rb. Thos.

jul jul jul jul jul jul jul oct oct oct oct oct oct oct jan feb apr jun sep jan feb apr jun sep jan feb apr jun sep jan feb apr jun sep jan feb apr jun sep jan feb apr jun sep jan feb apr jun sep jan aug nov dec aug nov dec aug nov dec aug nov dec aug nov dec aug nov dec aug nov dec mar mar mar mar mar mar mar may may may may may may may RUSSIAN ECONOMY IN trends and outlooks Because of the above conditions unfavorable for expansion of financial intermediaries businesses, the year of 2011 saw the process of contraction of the number of professional participants in the securities market continue, nonetheless, as evidenced by Table 3. In alone, particularly due to introduction of increased capital requirements effective as of 1 July 2010, the number of brokers was down by 9.1%, and that of dealers by 10.4%, while the number of participants in trading at MICEX plunged by 0.8%. According to NAUFOR (the Russian National Association of Securities Market Participants), at yearend 2010 FSFM revoked 236 licenses for their former corporate holders non-compliance with the agencys capital adequacy requirements1. According to Mr. A. Timofeev, head of NAUFOR, those actions yielded no positive results2. In 2011, the number of brokers and dealers shrank by 10.6% and 9.4%, respectively, while the number of participants in MICEX trading slid by 2.3%.

Table The Number of Professional Stock Market Participants 2007 2008 2009 2010 1. The number of organizations awarded a FSFM license to exercise:

1.1. Brokerage 1,445 1,475 1,335 1,213 1,change in % vs. the previous period 2.1 -9.5 -9.1 -10.1.2. Dealer operations 1,422 1,470 1,337 1,198 1,change in % vs. the previous period 3.4 -9.0 -10.4 -9.2. The number of participants in MICEX trading 636 669 654 649 change in % vs. the previous period 5.2 -2.2 -0.8 -2.Source: by data of FSFM, NAUFOR, SE MICEX.

Unfortunately, the absence of publicly available financial reports of brokers, dealers, trust managers, and requirements to their mandatory submission in compliance with the IFRS standards does not allow an objective assessment of the impact increase or lowering of barriers to entry/exit this kind of business have on its efficiency. Without such an analysis, any decisions on tightening or loosening requirements to capital adequacy will be doomed to remain subjective. Yet greater concerns about effects of drastically intensified regulatory influences on financial institutions business are stirred by the fact that the governmental measures have not yet been coupled with real steps to implementing an adequate stock market development strategy. The beefing-up of regulatory and oversight measures, with no robust efforts in the business development area missing, may entail just a rise in public structures monopoly, supplanting of legal forms of financial mediation by illegal ones, particularly in regions, and domestic investors increasingly picking foreign financial service providers.

That private financial structures are increasingly concerned about public agencies interferences in their business is evidenced by acquisition, upon FASs consent, by Zoulian Trustees Limited (Cyprus) of 99.5% of voting stock of JSC Investment Holding Finam. The Finam representative commented on the deal in the following manner: we have not faced any hostile takeover, but anything may happen in Russia3. The banking sector statistics also mirrors growing doubts about the domestic market prospects. Between 2009 and 2011 shareholders of as many as ten foreign banks4 announced scaling back on their presence in Russia, including International Personal Finance, Santander, Rabobank, Barclays, Swedbank, HSBC, RBC Group, Trifonov A. No indulgency for managers. Vedomosti, 23 June 2011.

Smorodskaya P. Capital adjustment. Kommersant, 16 May 2011.

Zhelobanov D., Gubeydullina G. Finam is going off-shore. Vedomosti, 1 July 2010.

Dementieva K., Khvostik E. A foreign body. Kommersant, 31 March 2011.

Section Financial Markets and Financial Institutions Morgan Stanley. Numerous investment companies and banks in Russia declared personal banking services to wealthy Russians as the most preferred alternative to retail banking.

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