1. Strategies for stock market development American Chamber of Commerce Outlook, July 2, 2010 Tālis J. Putniņš, SSE Riga and BICEPS

2. Why develop financial (stock) markets? Two fundamental roles: –Pool and transfer household savings to investment by firms –Efficiently allocate capital to its most productive uses Banks are good; stock markets have advantages –Allocation efficiency –No collateral, high risk projects –Diversification => larger pool –Exit option for VC

3. Where we stand today Sources: World Federation of Exchanges, European Federation of Exchanges, World Bank, author’s calculations

4. Liquidity AND Information AND Shareholder protection Cost of equity Investment (market cap.) and econ. growth

5. Positive steps taken to date EU accession Securities law reform Incorporation into Nasdaq OMX group Move to INET trading platform Acquisition of electronic surveillance technology Provision of real-time market data First independent institutional equity research company in Baltics (Emerging Nordic Research)

6. 10 Directions for the future (1) Liquidity –Market makers (paid for by exchange or firms) –Maker-taker pricing of liquidity –Consolidation of Baltic and Nordic exchanges - a single market –Trading in Euros –Subsidized IPOs (liquidity externalities) –Partial privatization

7. 10 Directions for the future (2) Information –Increased regulatory pressure on firms’ information disclosure (enforcement) –Stock analysts Shareholder protection –Active and visible enforcement (public, and more favorable conditions for private) –Cross-listing in developed markets

8. Conclusions Stock markets are important Market capitalization is the result, not cause of a functional market, i.e., privatization is not a complete plan for stock mkt. development Recommendation: simultaneously pursue strategies to improve: –Liquidity –Information availability –Shareholder protection