Q: Could you give us some background information on the Prague Stock Exchange? How has the investment culture evolved in the Czech Republic in the past 10 years?

A: The origins of the exchange go back to 1871, when it was functioning both as a commodity and securities exchange, and it was especially prosperous in the period 1920 to 1939. But in 1939, during World War II, the market closed for more than 50 years.

The stock exchange reopened in 1993, after the fall of communism and following the decision to privatize companies in the previously state-owned economy. After the revolution in 1989, the Czech government undertook a process that resulted in the privatization of more than 1,700 companies. At that time the need to price and trade those companies prompted the development of a capital market.

So the Prague Stock Exchange opened in 1993 with more than 1,700 companies listed. Every adult Czech citizen could participate in the mass privatization process and most people took advantage of that option. The result was that for some time, about 65% of the population above 18 years owned shares. The population of the Czech Republic is a little bit over 10 million people.

Of course, they had no experience of being shareholders and had to learn what it means, so there definitely was an educative period at the beginning. Also, not all the companies were prepared to be traded on the exchange at the beginning. That is why the Prague Stock Exchange introduced listing criteria, such as liquidity and the ability to fulfill all the information obligations. In that way we reduced the number of traded companies to few hundreds.

Q: How many companies currently trade on the exchange? And what is your estimate for the number of retail investors on the market?

A: Currently, there are 32 companies listed on the exchange, but the trading volume is growing, even if you compare it to the period when we had more than 1,700 companies. Energy would be one of the major sectors, represented by CEZ, a heavily traded power producer. The second largest sector in terms of trading would be banking and finance, and then sectors like chemicals, pharmaceuticals, business services, and textile.

We also trade others products suitable for retail investors, such as investment certificates, notes, futures, etc. Until the end of the year we expect two more banks to start issuing structured products listed on the Prague Stock Exchange.

The retail investors account for about 10% to 15% of the trading volume. Of course, many people still keep their accounts from the mass privatization, but they are not active investors. Some of them trade once per year or once every two years. The investors who trade on a daily or weekly basis are probably about 20,000 to 25,000 people but this number is growing with the education about the potential of the capital markets.

That size of retail investors is smaller than in Poland, for example, so there is potential for development. It is a good signal that when we hold seminars that aren’t free of charge, even on Saturdays, there are always 300 to 500 young people showing up. And this audience is really hungry for information how to invest, where to invest, and in which products.

Last December, we had two IPOs and that served like a wake up call for many retail investors. There were probably several thousand new investors coming to the market just because of the publicity the capital market received.

Q: What’s your policy for educating and attracting the retail investors?

A: We expect four to five IPOs until the end of the year and we expect them again to bring new investors to the market. This year we launched our website for retail investors, and this site allows them to choose the product, the money they wish to invest, and to play with it before deciding to come to the real market to trade real money.

In addition, we provide informational brochures with trading terminology, IPO processes, investment certificate forms, etc. Also, we cooperate with many universities in the Czech Republic, which we regularly visit to talk to the students about investments and investing securities traded to the Prague Stock Exchange.

One of the major issues currently in the Czech Republic is that the pension reform has not been done yet. That was the hot topic of last year elections and is still widely discussed. Overall, the pension reform should develop soon and will definitely influence the capital market as in Warsaw, for example. The Prague Stock Exchange has been actively involved in the process - last year we organized a big conference, inviting all the people related to the government, the pension reform, and the financial market.

Q: What are the key elements of the pension reform that should have a positive impact on the market?

A: Currently, pension funds exist only as part of a voluntary system. In the Polish market, the pension funds are kept at home because they have to invest their asset back on the Warsaw Stock Exchange. That enormously helps to build liquidity, and we expect the same development in the Czech Republic in the short run.

Q: How has the nature of trading changed in the past five years? What have been the major developments?

A: The biggest change happened in 1998, when we decided to introduce a segment with market makers who provide liquidity. We introduced SPAD trading, a System for Support of the Share and Bond Markets, which is based on the activities of market makers responsible for providing enough liquidity on the market. A market maker is a member of the exchange who has concluded a contract with us to act as the market maker for selected issues.

That really helped us to build transparency and to provide investors the chance to follow the market in real time. Through the market makers, investors are sure that on the market there is always somebody who has to buy or sell, or prepare to buy or sell. The number of investors increased and liquidity started to grow.