Market Environment
Stock market and alternative trading venues
Competition of financial instrument trading venues has largely increased over the past few years. Operators of regulated markets compete for new issuers, investors, liquidity and trade. Another challenge for exchanges is posed by OTC markets and multilateral trading facilities (MTF). They offer trade in the same stocks as those listed on traditional exchanges. Some MTFs have been licensed as exchanges, for instance CBOE Europe Equities, the biggest stock trading venue in Europe in 2018.
The experience of other exchanges suggests that the emergence of alternative trading venues boosts the total turnover in stocks on the market due to arbitrage strategies pursued by market participants who trade in the same stocks on two or more venues. However, the percentage share of incumbent exchanges in total trading typically shrinks. Trading in Polish equities has been offered for several years by the London-based venue Turquoise and, since 5 November 2018, by CBOE Europe Equities. However, save for several short periods, neither of them reports any trading. This could suggest that smaller markets, such as GPW, tend to concentrate trading.
Alternative trading venues which support trading in Polish stocks offer significantly lower execution costs but are much less competitive in terms of the cost of clearing and settlement. To address potential risks of competitive trading venues, GPW focuses on improvements to the liquidity of the stock market and the quality of the electronic order book. GPW has extended price promotions for electronic traders (HVP, HVF) and implemented incentive schemes for market makers. GPW has launched and improved system functionalities which address the needs of large ticket traders.
Equity trading on European FESE exchanges and alternative trading venues [EUR bn]
Scource: FESE – European Equity Market Report. According to FESE, CBOE Europe Equities is classified as a regulated market. On this charts we present it as Alternative trading platform
According to FESE classification, in 2018, MTFs (Turquoise, Aquis Exchange) and CBOE Europe Equities (originally an MTF, recently classified as a regulated market by FESE) generated EUR 3.3 trillion or 29.1% of European stock trade on the electronic order book.
The total value of trade on the electronic order book in Europe (including exchanges and MTFs) was EUR 11.2 trillion in 2018, an increase of EUR 0.2 trillion or 1.8% year on year.
CBOE Europe Equities was the leader in Europe by the size of trading on the electronic order book in 2018.
Concentration of turnover in stocks on the electronic order book on exchanges and MTFs in Europe in 2018
Source: FESE – European Equity Market Report, WFE
According to the FESE European Equity Market Report3 w 2018 r., traditional exchanges had a much lower concentration of trade in stocks than MTFs in 2018: the top MTF was CBOE Europe Equities.
The top venues which generated the highest turnover in stocks on the electronic order book in Europe in 2018 included: CBOE Europe Equities (EUR 2.4 trillion; share 21.2%), London Stock Exchange Group (EUR 2.1 trillion; share 19.1%), Euronext (EUR 1.9 trillion; share 16.6%) and Deutsche Boerse (EUR 1.5 trillion; share 13.7%). GPW generated 0.43% of the total trade in stocks on the electronic order book in Europe in 2018.
Number of listed companies
All European exchanges listed 7,519 domestic companies at the end of 2018. The Spanish exchange BME had the biggest number of listings (2,979 companies) accounting for more than 39.6% of all European listings. GPW ranked fifth with 823 domestic companies representing 10.9% of the total number of domestic companies listed on European exchanges.
GPW’s regulated market lists 465 companies (414 domestic companies and 51 foreign companies) and NewConnect lists 387 companies (381 domestic companies and 6 foreign companies). There were 7 IPOs on the main market and 15 IPOs on the alternative market in 2018.
Number of domestic companies listed on European exchanges in 2018
Source: FESE, WFE
Capitalisation of stock markets
According to WFE, in 2018, the total capitalisation of all exchanges globally decreased by 12.9% to USD 74.5 trillion at the year’s end (source: WFE). The biggest decrease in capitalisation (by 17.8% to USD 23.9 trillion) was reported on the exchanges in Asia and Pacific whose share in the total capitalisation of all exchanges globally was 32.1% at the end of 2018. The US exchanges which have the biggest share in the total capitalisation of all exchanges globally (45.9%) reported a decrease of capitalisation by 6.3% to USD 34.2 trillion. Exchanges in EMEA (Europe, Middle East, Africa), including GPW, reported a decrease of capitalisation of domestic companies by 17.7% year on year to USD 16.4 trillion. With a decrease of capitalisation of domestic companies by 20.3% year on year to USD 160.5 billion, GPW was the 12th biggest EMEA exchange. The biggest global exchange was NYSE with a capitalisation of domestic companies at USD 20.7 trillion at the end of 2018, followed by NASDAQ with a capitalisation of USD 9.8 trillion, Japan Stock Exchange – USD 5.3 trillion, Shanghai SE – USD 3.9 trillion, Hong Kong SE – USD 3.8 trillion, Euronext – USD 3.7 trillion, London SE – USD 3.6 trillion, Shenzhen SE – USD 3.6 trillion and Deutsche Boerse – USD 1.8 trillion.
Capitalisation of domestic companies on exchanges in 2018 according to WFE [EUR trillion]
Below are FESE statistics (in EUR billion) of the capitalisation of domestic companies on European exchanges. The biggest exchange is the Euronext Group (EUR 3,259 billion) followed by the LSE Group (EUR 3,173 billion) and Deutsche Boerse (EUR 1,533 billion). With a capitalisation of EUR 140 billion, GPW ranks eighth.
Capitalisation of domestic companies on European exchanges in 2018 [EUR billion]
Source: FESE, (monthly statistics, December 2018); LSE Group data based on WFE statistics and converted from USD to EUR
Change in capitalisation of domestic companies on European exchanges in 2018 [% change in EUR]
Źródło: FESE (monthly statistics, December 2018); dane o LSE Group pobrano ze statystyk WFE i przeliczono z USD na EURO
Equity trade
According to WFE, the total value of trade in shares of domestic companies on the electronic order book was USD 97.4 trillion globally in 2018, an increase of 17.7% year on year, mainly driven by a 35.7% increase (to USD 54.6 trillion) in the value of trade on US stock exchanges which generated 56.1% of total trade in shares globally in 2018. The value of trade in shares on EMEA exchanges increased by 11.1% to USD 13.6 trillion mainly due to an increase in the value of trade on LSE Group, Euronext and Deutsche Boerse. Asian exchanges reported a year-on-year decrease in the value of trade in shares by 3.6% to USD 29.2 trillion.
According to FESE statistics, the value of trade in shares on the electronic order book on GPW decreased by 13.4% to EUR 48.3 billion (in PLN: by 13.6% to PLN 204.3 billion). The value of trade in shares on the electronic order book on European exchanges was EUR 8.0 trillion in 2018 vs. EUR 7.8 trillion in 2017, an increase of 2.6% year on year.
The biggest turnover in shares on the electronic order book on the European market was generated by the LSE Group (EUR 2.2 trillion), followed by Euronext (EUR 1.9 trillion), Deutsche Boerse (EUR 1.5 trillion), SIX Swiss Exchange (EUR 0.8 trillion), Nasdaq Nordiqs&Baltics (EUR 0.7 trillion) and BME (EUR 0.5 trillion). The concentration of the top six exchanges with the highest turnover in shares in 2018 was 96% of the total turnover in Europe. GPW’s share in European turnover was 0.6% in 2018.
Value of trade in shares on European exchanges in 2018 [EUR billion]
Source: FESE (monthly statistics, December 2018); LSE Group data based on WFE statistics and converted from USD to EUR
Change in the value of trade in shares on European exchanges in 2018
Źródło: FESE (monthly statistics, December 2018); dane o LSE Group pobrano ze statystyk WFE i przeliczono z USD na EUR
Velocity
Velocity measured as turnover to average monthly capitalisation on European exchanges was 37.1% in 2018 (based on FESE data in EUR). The highest velocity ratio was reported by Deutsche Borse, BME and the London Stock Exchange Group. GPW’s velocity ratio was 34.4% in 2018..
Velocity on European exchanges in 2018.
Source: FESE, WFE for LSEG
To summarise, 2018 was very demanding and challenging for GPW compared to other European exchanges. GPW’s share in the capitalisation of domestic companies on European exchanges was 1.07% in 2016, 1.24% in 2017 and 1.19% in 2018.
Energy and Gas Market
- 2018 was a record-breaking year as measured by volumes of trading in electricity and gas on TGE. It was the third consecutive record year on the gas market. The electricity market saw a reversal of the downtrend reported in 2016-2017.
- The volume of trading in electricity forwards picked up early in the year as turnover grew by more than two-thirds year on year in January and February. March brought a breakthrough as the monthly volume of trading crossed 15 TWh for the first time since November 2015 and reached 17.9 TWh. The prices of CO2 emission allowances started to rise sharply, causing higher electricity prices and more volatility; as a result, trading volumes grew rapidly. The volumes remained stable until mid-year but the expected increase of the mandatory level of sale on the exchange bolstered trading in H2. Under those circumstances, September 2018 was the best month as measured by turnover on the exchange since 2010: the total volume of spot and forward transactions was 30.8 TWh, including 28.6 TWh of forward transactions. The year closed at a record-high volume of 198.3 TWh on the forward market and 226.1 TWh of total turnover (21.0% more than the previous record from 2014 and up by 102.5% year on year). The volume of spot transactions alone increased by 9.8% year on year and reached 27.7 TWh in 2018, which was 0.1 TWh more than the previous record from 2016. The legal amendment which raised the level of mandatory sale of electricity on the public market to 100% of domestic production was signed into law by the President of Poland in December 2018. However, in view of significant new exemptions from the obligation, the amendment may fail to boost trading in electricity on the exchange year on year in 2019.
- The key regulations governing the gas market remained unchanged; consequently, the key driver of trading on the exchange were sharp changes of prices linked to oil prices, which started to rise in February and dropped rapidly in Q4. Turnover on the TGE spot market was stable year on year in 2018 (down by 1.3% YoY) but high turnover in H2 boosted volumes of forward transactions by 4.3% (119.6 TWh). The total volume of trading in gas on the exchange reached 143.3 TWh, which was 3.4% more than the previous record reported in 2017.
- In view of all those factors, including rising prices of oil, emission allowances, as well as coal, the prices of electricity and gas on European exchanges rose sharply in 2018. The turnover on spot markets in gas increased rapidly, as well, but the volume of forward transactions dropped significantly. The trend was mainly set by the biggest European hub: TTF in the Netherlands. The volume of spot trading in electricity grew in 2018, mainly driven by the development of the European intraday market in the XBID project. The volume of electricity futures in Europe also increased with the exception of Nasdaq Commodities (mainly the Nordic market) whose turnover declined for a second year running. The marked difference between the German and the Nordic market is also due to the fact that the EEX Group reports trading volumes including cleared transactions outside the sessions; the comparable volume of Nordic contracts traded in Nasdaq was 952 TWh in 2018 (twice the volume traded at sessions, down by 10% YoY).
Volumes of Trade in Electricity and Gas in European Hubs
Volume of trade in electricity on European exchanges in 2018 (spot) [TWh]
Source: TGE based on exchange data
Volume of trade in electricity on European exchanges in 2018 (forward) [TWh]
Source: TGE based on exchange data, estimates for EEX
Volume of trade on European gas exchanges in 2018 (spot) [TWh]
Source: TGE based on exchange data, estimates for EEX
Volume of trade on European gas exchanges in 2018 (forward) [TWh]
Source: TGE based on exchange data, estimates for EEX
The example of other European countries confirms that the outlook is strong for the exchange energy market and its importance may increase for two reasons. First, when it comes to the electricity market, the volume of transactions on the exchange may increase in relation to the volume of bilateral trading; second, there is room to grow the overall liquidity of trade in commodities. The development of infrastructure supporting imports of both commodities and generation of electricity certainly helps but it is as important for TGE to establish closer relations with traders in order to align its organisation with their specific needs.
Property Rights
- An amendment of the Act on Renewable Energy Sources, which took effect in 2018 triggered a series of RES auctions held at the end of the year. The regulatory amendment increased the mandatory level of green certificates to 19% of sales to end customers in 2019 and 20% in 2020. These numbers include 0.5% allocated exclusively to energy from agricultural biogas. The mandatory levels were raised by 1 percentage point (the allocation to energy from biogas remained unchanged). Following the limitations imposed in 2017 on the option of making substitution payments in order to meet the obligation, the amendments drive bigger volumes of trading on the exchange. The turnover remains high despite the emerging alternative RES support system based on auctions organised by the Energy Regulatory Office. Turnover in green certificates on the Property Rights Market was approximately 30.1 TWh in 2018, the second highest level in TGE’s history (after 32.1 TWh in 2014).
- Another significant legal amendment came with the Act on Promotion of Electricity from Cogeneration, which links to the phasing out of the cogeneration support scheme based on certificates issued and traded on the exchange. (Dz.U. 2019 poz. 42), The current scheme operates on TGE for production from 2018 and will end after June 2019.