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RUSSIAN ECONOMY IN trends and outlooks The data on the start and the end of the VEBs intervention on the market allows evaluation of the state-owned banks and their affiliated structures1 trading activity at MICEX. The data are presented in Fig. 11. The peak of the public structures activity fell on the period between October and December 2008. At the time, VEB was likely to acquire Russian issuers shares, thus supporting the market. As stated in the VEB annual report, as of 1 January 2009, the Bank owned a securities portfolio acquired at the expense of the national Welfare Funds resources that totaled Rb. 159.7 bln. That is to say, over 90% of the capital allocated on support was spent during the period concerned. Meanwhile, over the same three months foreign investment funds cashed in USD 1.9 bln., or Rb. 60 bln. from sales of stock.

Fig. 12 demonstrates that the MICEX index hit the bottom in December 2008; in October, November and December 2008, its values accounted for 731.96, 611.32 and 619.53 points, respectively, while in January 2009 it made up 624.9 points. The RTS index hit the bottom in January 2009; between October and December 2008 its values stood at 773.37, 658.14 and 589.79 points, while in January and February 2009 at 535.04 and 544.58 points, respectively. This might evidence that the VEBs massive buys of nosediving shares in the late 2008, perhaps, did help have the jitters investors, primarily domestic ones, to get rid of their stock at the bottom of the crisis. That, perhaps, kept the market afloat and saved it from yet a deeper fall by another percentage points. But, had there been no VEB investments at the time, nothing yet more daunting would have occurred with the Russian stock market. Those who ran scared and wanted to get rid of their shares at any price would have faced a low liquidity of the market, which might have cooled them down. The economy began to gradually recover in March-April 2009, and the market saw a new inflow of foreign portfolio capital.

4000 3136 3146 3037 3024 3032 2865 2446 2331 2217 2500 2177 2000 985 820 813 1000 683 675 647 597 604 614 539 485 498 414 0 2009 2010 Volumes of private stock broker firms (left axis) Volumes of trading of public structures (left axis) MICEX index (right axis) Source: calculated by the MICEX data.

Fig. 12. Dynamic of the Index and Volumes of Trading of Different Groups of participants in the Exchange Market of MICEX between May 2008 and January VEB, VTB, VTB Kapital, VTB 24, Gasprombank, Sberbank, KIT Finans, Svyaz-bank, and Bank of Moscow Rb. bln May 2008=100% jul.

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Section 3.

Financial Markets and Financial Institutes The situation with the VEBs reversing sale of the shares is not clear. In its 2009 annual report, the bank reckoned that it had sold a fraction of the stock package acquired at the expense the aforementioned loan from the National Welfare Fund yet in the second half 2009.

As demonstrated by Fig. 11, at the time, the state-owned structures showed no increased activity on the exchanging market for shares, except for July, which was in sharp contrast with the period when VEB was buying those shares. Plus, taking away USD 6 bln. from the market between July and December 2009 should have become a knife in the back of its gradual upwards dynamic. There was nothing like that at the time, either. All that allows assumption that VEB did not sell the full package of shares in question, while the Rb. 175 bln. it returned to the RF Ministry of Finance in late December 2009 was taken from some other source. In general, it can be asserted that the governments financial interventions to support the market were unjustifiable. Such interventions might have smoothed the gradient of the markets fall, but they failed to affect the trend itself. In this case, it looks like the public bank swung a lucrative marginal deal by using a very generous by its term and conditions loan, rather than the state gave an upper hand to the stock market and investors.

1 1 1 1 1 2005 2006 2007 2008 2009 2010 Stock Corporate bonds Regional and municipal bonds Source: calculated basing on the MICEX data.

Fig. 13. Herfindahl-Hirschman Index In addition to the process of revival of the stock markets capitalization and liquidity (Fig.

4 ), the secondary exchanging stock market saw the level of its concentration decline, which proves stability of performance of the market-based pricing on the domestic market. This is jul.

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RUSSIAN ECONOMY IN trends and outlooks proved by data of Fig. 13, which contains data on the Herfindahl-Hirschman Index1 (HHI) of turnover on the market for shares, corporate and regional bonds at MICEX between January 2005 and February 2011. According to FASs approach, the market is a low concentrated one under HHI value being under 800, moderately concentrated with 800 < HHI < 1,800, and highly concentrated with HHI making up 1,800 plus 2.

The Russian securities market has recently been low concentrated, with the HHI value drifting below 800. It was only during the crisis, between August 2008 and March 2009, that the HHI values sometimes were over 800, as far as stock and Rb.-denominated bonds are concerned. But even that HHI on shares sky-rocketed in February 2009 was a result of 16 REPO deals worth a total of Rb. 1,620 bln., which some brokers erroneously stroke with Gasprom ordinary shares on 2 February 2009. The Arbitration Commission under JSC MICEX consequently annulled the deals with its decision of 18 February 2009.

Interestingly, during the 2008 crisis and in its aftermath the HHI values on corporate bonds remained steadily lower than those on the stock market. That is likely to mirror the existence of a more diversified circle of participants in the market for corporate bonds vs. the stock market. In February 2011, the HHI on shares hit 460.8 vis--vis 205.6 posted by the HHI on corporate bonds. Back in 2001, the HHI on regional bonds was steadily over 800, which allows attributing the market to moderately concentrated ones, whose array of participants is fairly limited. In February 2011, the HHI on regional bonds accounted for 908.5.

Fig. 14 exhibits data on changes in the structure of transactions with shares on MICEX.

They reveal a trend to a post-crisis recovery in the structure of exchanging equity deals associated with the REPO segment. By using REPO transactions on the stock market brokerages, as a rule, draw short-term borrowed capital for a subsequent marginal lending. In December 2008, the proportion of REPO transactions accounted for 68% of the aggregate cost of exchanging deals with shares at MICEX; the subsequently figure slid to 50% at the end of the year and bounced up to 59% in February 2011. The upsurge in the proportion of REPO deals evidences the marginal lending to transactions involving securities has got a fresh start. This, on the one hand, means investors are keener to ride the market for risky assets, while it serves an indicator of the rising speculative activity on the national stock market, on the other.

The growing popularity of systems of short-term, primarily algorithmic, trading and engagement of trading robots has emerged as an important avenue of the exchanging stock markets development. This is proved by results of Best Private Investor contests RTS and MICEX were running in the late 2010. The victor was a trader who used robots. According to the Russian exchanges data cited by Kommersant, up to 90% of trading claims and 50% of the turnover at the RTS FORTS fall on robots; at the MICEXs spot stock market, hyperactive trading robots hold 45% of claims and 11-13% of volumes of trading, with 95% of the said Herfindahl-Hirschman Index is calculated by squaring the percentage share of each given participant in the volume of exchanging trading and summing up the results:

HHI = (D1) 2 + (D2) 2 +... + (Dm) 2, where Di share on the market of i-th participant in percentage equivalent;

i = 1, 2,..., m.

See p.2.6.4. of the Methodological recommendations on the procedure for conduct of evaluation and assessment of the state of competitive environment at the financial services market approved by the RF Ministry of Anti-Monopoly Policy with Executive order of 31.03.2003 86.

Section 3.

Financial Markets and Financial Institutes applications subsequently being withdrawn without concluding a deal1.: The problem of algorithmic trading does exist, and a great number of robots seems spooky; the rise in their number overloads the exchanges gateways, which, theoretically, can entail technological problems2, Mr. V.D. Milovidov is quoted as saying in the same article. Responding to the challenge, in the late July 2010, MICEX sent out to its participants a proposal to approve amendments to the exchanging trading procedures that provided for identification of robots that put forward trading claims outnumbering 1% of the aggregate number of claims put by all the participants, ie. over 40,000 claims a year. The exchange will block such hyperactive robots operations in the event they pose a threat to the normal functioning of the exchanging trading system. In March 2011, MICEX kept taking on trading robots: since 1 March 2011, the exchange set a minimal commission fee of Rb. 0,18 per deal. Plus, it established requirements to the minimal size of the round lot at an amount of no less than Rb. 1,000, which should result in enlargement of most stock and shares round lots. The measures focus on encouragement of conclusion of large deals and minimization of the number of deals exempt from commission fee3.

2005 2006 2007 2008 2009 2010 Auction (Negotiated) regime Negotiated deal REPO transactions regime Source: by MICEX data.

Fig. 14. Structure of Deals with Stock on MICEX, as % Smorodskaya P. MMVB vzyalas za robotov: birzhevuyu torgovlyu distantsiruyut ot avtomatov. Kommersant, 20 July 2010.

Ibid.

Trifonov A. MMVB ne khochet melochyitsya. Vedomosti, 8 February 2011.

RUSSIAN ECONOMY IN trends and outlooks Fig. 15 presents data on the number of deals and the average volume of one deal in the regime of market (anonymous) stock trading at MICEX. The data show that during past two years, the average monthly number of deals soared from 6.8 mln. in December 2008 to 10.mln. in February 2011, or by 55.9%. Meanwhile, the average volume of market deals involving shares at the exchange was notably down, despite the ongoing process of stock prices recovery. In September 2009, the average size of the deal involving stock under this particular regime of trading at MICEX accounted for Rb. 145,200, while in February 2011 -117,300, or down by 19.2%. The advancement of the algorithmic trading manifests itself primarily in the rising tide of claims in the trading system. However, a notable increase in the number of exchanging deals in tandem with the fall in their average volume also witnesses investors growing increasingly keen to engage in speculative trading strategies.

one transaction value, thousand Rb transactions, number 400 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0 2005 2006 2007 2008 2009 2010 Source: by MICEX data.

Fig. 15. Market Deals with Stock at MICEX During the crisis, FSFM took a pro-active stand and in an attempt to fence the market participants from overly risky operations, interfered with the trading. Due to the markets increasing volatility, on 18 September 2008, the regulator banned short interests for brokers.

The ban was lifted on 26 September 2008, re-imposed on 30 September 2008 and remained effective through 15 June 2009. Since 25 September FSFM also limited the use of leverage for margin deals1 stricken by brokers clients. Once introduced, the regulators restriction resulted in leverages on marginal transactions for all investors capped with the 1:1 ratio. The right to use of the previous ratio of 1:3 was restored solely for qualified investors since June 2009, albeit with some additional restrictions. Introduction of such limitations demanded A margin transaction is the one the brokers client enters into to buy securities at the expense of a loan granted to him. In contrast to short interest used for a hit-and-run entry, marginal trading strategies are used, as a rule, on a bull market to ensure extra profit from the use of the leverage.

Rb bln transactions, number Section 3.

Financial Markets and Financial Institutes for a FSFMs permanent and efficient supervision, which in reality was non-existent1. At that juncture, in a 2009 paper, the Institutes experts suggested that while brokers somehow observed with the margin lending limitations, short interests thrived, regardless of the regulators bans2.

The year of 2010 saw adoption of critical decisions in the financial market regulation area.

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