Where Have All the Traders Gone? Turnover at Tel Aviv Stock Exchange Is Sinking

Market figures dropped 44% from beginning of 2010, the lowest since 2006. The crisis isn't felt by the general public because TASE indices have yet to fall.

May 26, 2010 was an unforgettable day for the Tel Aviv Stock Exchange. That was the day it graduated from the MSCI index for emerging markets to the big league MSCI World for developed nations. The TASE experienced its largest ever turnover that day − NIS 16 billion − causing brokerage systems to crash under the strain.

Warnings about what had happened to the stock markets in Greece and Portugal when they were grouped with those in the United States, France and Germany were forgotten or ignored. Foreign investors, as it turned out, pay more notice to sharks swimming in a small pond than to minnows in the endless sea.

But the TASE was on a roll since mid-decade and seemed unstoppable. All Israel was abuzz about the hottest stock picks, like Africa Israel and Delek Real Estate. The 2008 crash hit Tel Aviv, too, like it did all world markets, but the local stock exchange came roaring back in 2009 and 2010 and rebounded more strongly than the others. The move to the MSCI World index affirmed that Israel had made it.

Nothing now remains of the electric mood prevailing just three years ago. The market’s average turnover in 2012 was the lowest since 2006, dropping 44% from the beginning of 2010, according to Bank of Israel figures. In the category of stocks and convertible bonds, average daily trading has fallen by more than half since 2008 to NIS 265 million last year. For days on end, some share would attract neither buyers nor sellers.

Over the past two years about 100 companies have been delisted while not a single company has been added. Meanwhile, 180 traded companies carry a “going concern” warning and NIS 20 billion foreign and local capital has fled Israel in 2011 and 2012.

Israel Securities Authority Chairman Shmuel Hauser appointed a special committee last month to come up with ways to improve trading and encourage liquidity. Another committee charged with exploring how Israeli start-ups can raise money on the TASE is expected to release its recommendations shortly.

“In early 2011 when foreign investment fell it was attributed to anxiety over the Arab Spring,” says Ester Levanon, CEO of the TASE. “Afterwards, it was blamed on the large drops in volumes seen in Europe. Not until the beginning of 2012 did we understand that the foreigners had reduced their investment in Israel. Not only did they transfer us to the category of developed markets, they also put us into an index that didn’t exist beforehand − the Europe-Middle East index. A year ago I started taking care of transferring to another index. We won’t know the answer until mid-June.”

The capital market crisis isn’t felt by the general public because the TASE indices aren’t falling − but they are nearly stagnant. The TA-25 index has been at its current level for eight months and largely unchanged from two or three years ago. In fact, over the past three years most of the public has lost money on their stock portfolio when taking into account commissions and fees.

But even if investment and pension portfolios haven’t collapsed, low volumes are still bad news. The stock market is the easiest way to attract foreign investment and a key way for the public to invest in business.

“We’ve been managing hedge funds for eight years,” says Nir Peleg, co-CEO at Kryptonite Hedge Funds. “When we started in 2005, 80% of our investments were in Israel and the rest around the world. In the last year this has reversed. One of the main reasons for going abroad is the trading volumes. A low level of interest in the market leads to high volatility. A market without volumes is boring and causes investors to flee. Turnover is the lifeblood of any stock exchange.”

The drop in turnover has a snowball effect, says Levanon. Foreign investors have an even harder time investing in the country. “A foreigner choosing to invest in a reasonable quantity of local stock needs to watch his step not to influence the stock price while buying so as not to boost the purchase price. This poses a problem at low volumes,” she explains.

Conservative investors

It’s easy to pin the blame on Israel’s position in global indices, but the situation is also due to other factors. Trading volumes are tumbling throughout the world. “Since the markets fell after the 2008 crisis, investors all over the world are much more conservative,” says Hans-Ole Jochumsen, an executive vice president of Nasdaq. “Everyone is looking for income without risk and staying away from derivatives, which were at the heart of the crisis.”

“There is a problem with the basic concept, a lack of understanding that the stock market itself is a product, and like every product it needs to be marketed − otherwise nobody will buy it,” says Peleg. “Thought on a marketing level needs to be put into how institutional investors in Israel and abroad can be made to take an interest in the stock market, working with proper marketing plans, and reflect the interesting economy we have here.” Peleg cites the strong shekel and sophisticated bond market as attractive features for the TASE.

“Considering the strength of Israeli high-tech, there’s no reason that a strong high-tech stock market doesn’t operate here,” says Peleg. “We can also utilize our comparative advantage of having one of the only stock markets in the world with trading on Sundays.”

Israel has an example it can learn from: Five months ago Nasdaq paid nearly $400 million to acquire the investor relations, public relations and multimedia divisions of Thomson Reuters for one purpose − to deal with its low trading turnover and improve its information, market analysis and communication services to investors and the companies trading on it.

The TASE has also fallen behind in the variety of financial products offered. The few products that the exchange is launching shortly, like weekly options on the TA-25 index, have little marketing and support.

Israeli companies are also lacking awareness of the need to market themselves and investor relations are managed poorly. While American companies maintain special websites for this, Israeli companies don’t understand that a sophisticated website can serve as a showcase. Few conduct road shows.

Company managements throughout the world conduct conference calls with investors and analysts and post these on their websites, a far cry from what companies in Israel provide. While companies overseas invite investors to subscribe to reports on activities, in Israel this doesn’t exist. Stock exchanges give their listed companies advanced systems to segment investors to discover who to target to generate trading. Tel Aviv offers nothing of the sort.

Another problem is over-regulation. Eyal Waldman, the CEO of dual-listed chip maker Mellanox, sounded a warning bell about this last week when he threatened to delist his shares from the TASE. He cited the 25% capital gains tax and rules that encourage institutional investors to put 80% of their money abroad.

“But in the end, the main reason for this situation is the accumulation of regulations,” Waldman said, citing the debate now underway about limiting the number of tiers of companies a pyramid group can hold. “The regulators have sought to create some order and tried to solve the problem all at once. You have to do things proportionately, give the market a chance to breathe,” Waldman says.

Regulatory overdrive

A treasury official, speaking on condition of anonymity, looked to what happened in the United States after Enron collapsed. “The American stock market went into regulatory overdrive and it's hurt the U.S. capital market and boosted European markets. The advantage the Americans have is that they always have their hand on the pulse and they’ve reacted over the last few years in all kinds of ways.”

Among the measures were rules encouraging small companies to list their shares and easing reporting requirements for companies with turnover of less than $1 billion for the first five years after they float shares.

In Israel, however, there has been no similar response. It seems some regulators have gotten used to their main job being to watch out for improper actions by traders, company owners, and investment institution managers, and have forgotten that it’s also their responsibility to ensure that the business thrives.

“We have bureaucratic regulations connected with transparency and controlling risk,” says Elad Benbaji, chairman of the Association of Bourse Members. “But there’s another kind of regulation − competitive regulation designed to create healthy market conditions that enable fair competition. The last time we tried that in Israel was the Bachar committee.” 

Bloomberg