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The volume of trade on the Tel Aviv Stock Exchange, in the doldrums for some time, has dropped even further over the past month, with the average daily volume totaling around NIS 150 million. The low trading volume in the exchange's 940 listings is divided among commercial securities, which include stocks, convertible options and convertible bonds.

Of these securities, 200 stocks haven't caught the interest of any stock exchange traders, with not even one shekel of trading listed for any of them during the business days of the past month. The low tradeability of these stocks has prevented many investors from selling the shares they own even at sharp losses, and the market value of firms on the stock exchange does not reflect their real value.

Yeter on the map

Shai Barak, the CEO of the fund management firm, Ilanot Discount, says that funds that invest in small-cap Yeter stocks (stocks not on the Tel Aviv 100) have a problem that stems from the low tradeability of the stocks - the low return on the funds, in relation to the return on the Yeter index itself. Barak says a review of the returns during the past nine years shows that only four of the 17 Yeter funds showed a return that was higher than the index, and this was only because of a change in their policies and thanks to investments in other stocks, such as those in the Maof index.

So, for example, in 1999, when the Yeter index rose by 86 percent, the funds rose by less than 60 percent - the reason being that the funds trade mainly in the 100 largest stocks of the Yeter and do not invest in the remaining 500 shares, perhaps because they can't get out of them if they so desire.

Barak says the institutional investments in the Yeter stocks are sometimes a trap, and if the owners of the units want the money, it is difficult for the funds to realize their holdings. "In a declining or static market, nobody goes near these stocks," Barak says.

Sometimes, when the stock market drops, it is a "honey trap," because owing to the non-tradeability, the stocks preserve a historic rate that does not suit the market conditions. This is also the reason for the laughable drop of about 0.5 percent in the Yeter index in September, as opposed to the indices of other stocks, which fell by about 8 percent.

Barak recommends ways of waking up the market so as to increase interest in the Yeter stocks. Among other suggestions, he recommends instituting new rules to bring in "market makers," as in the United States. He also recommends issuing a new Yeter index (Yeter 100) that would keep track of the 100 largest stocks. "Even issuing options for this index could put the Yeter on the map," Barak says.

A complex solution

The CEO of the stock exchange, Sam Bronfeld, says the tradeability of stocks is determined according to three main parameters, with only one being the method of trading, which is among the most advanced and best in the world. The other two parameters are the size of the company and the percentage of public holdings in its shares. Bronfeld says that new methods of trading and market makers cannot compensate for the low value of a company, or for a low percentage of public holdings.

The main problem of the Israeli market is that controlling shareholders do not scatter their holdings and buy additional stocks, even during these times. Bronfeld says that now perhaps they have no choice, but when they do issue shares and the stock exchange is at a high, they have to scatter their holdings at significant rates. He says the controlling shareholder should be interested in increasing the public's share of the stock that he issues, and no other considerations should be involved. The only thing we are missing, he adds, is behavior like that of the controlling owners of Teva, where capital is dispersed and tradeability is high.

"Acquiring stocks by reading the financial report is not the correct thing, and statistics for future tradeability should be taken into account, Bronfeld says. "The public does not have to buy stocks that it will not be able to get out of later, when the market weakens. New methods relating to changing the system did not help on the banks of the Thames, nor on the banks of the Hudson; and, therefore, they won't help on the banks of the Musrara. The sardines of Ahad Ha'am Street will not turn into the sharks of Wall Street."

Bronfeld says market forces can change the situation because the next time a company owner turns to the public to offer a stock issue, the public should buy the shares only if it believes that it will be able to get out of them in the future. "The situation is problematic and complex, and, therefore, so is the solution," he says.

The desperate seller

Alrov real estate (controlled by Alfred Akirov), which is included in the group of the "untradables" and has a market value of NIS 87 million, made do during the past year with a daily average volume of NIS 2,000. Last month, for example, the volume of trade in Michpalim, which holds one quarter of the shares of Maman Cargo, totaled zero shekels, while its average daily volume during all of last year was only NIS 800. Shoe manufacturer Brill, with a market value of NIS 38 million, and the real estate company, BSR Europe, of the Gibor Sport group, with a market value of NIS 74 million, are also included in this group of untradable stocks.

The Mivtach Finances company, for example, which is traded according to a market value of NIS 75 million, has recorded a year of very low tradeability and declines of 60 percent. Some deals carried out in the stock at the beginning of September, at a small sum of less than NIS 100,000, managed, in less than a week, to cut NIS 60 million from the value of the company. One deal, involving 200 shares at a value of NIS 3,500, caused the Mivtach Finances share to drop 17 percent on February 12. Two days later, a deal of NIS 50,000 led to an additional drop of 15 percent. The share plunged, therefore, by about 30 percent, with a volume that even the share with the lowest tradeability among the 1000 largest stocks on the TASE would have been ashamed of at the opening stage.

Another large group, which includes 665 stocks with somewhat higher rate of tradeability, but is also problematic, are those stocks that had an average daily volume of less than NIS 300,000 in the past month. This group includes stocks such as Benleumi, Ormat, Ituran, Delek Automotive, Sony, Emet Computerization, Mer Industries, Team and many others. These stocks also sometimes list small-volume tradings that have a dramatic effect on their value.

Only the 33 largest stocks on the exchange had an average daily volume of over NIS 1 million this past month. The stocks on this list, which some in the market call the "real stock exchange," include, in addition to the 25 stocks of the Maof, a few other individual shares such as Agis, Elite, Nice, Formula and Retalix.

One must be cautious about the value of a company as it is listed on the computer screens in trading rooms; this listed value does not reflect the company's real worth, which is determined by market forces only in a small percentage of the companies on the stock exchange. With regard to hundreds of stocks that are showing paltry trade volumes, the number that represents market value is of no importance. Sometimes the book is full of orders, the buyer and the seller exist, and it looks as though the situation is ideal, but even then, the gap between acquisition orders and sales comes to dozens of percentage points and the deals are not carried out.

For example, the desperate seller of a Mendelsohn share who visited the order book every morning last month, trying to sell the company share at a price 10 percent lower than the opening price, had to deal with a stubborn buyer, who was willing to buy the stock only at a price 50 percent lower than the opening sum. The result in the case of the Mendelsohn share was a fall of 25 percent, on a volume of only NIS 100,000.