If you are bored (and can be bothered reading the article) you...

If you are bored (and can be bothered reading the article) you may find an acceptable definition of a Premium exchange in the article below, which is eurocentric so may have some relevance. Or you may not.
Also, a Premium exchange may just be the differentiation from a Regional exchange.
Or, it can be The highest listing standards for the world’s leading companies, eg AIM v Premium in UK.

MULTILATERAL TRADING PLATFORM IN EUROPE AND HUNGARY 1 Krisztián Klis – Ágnes Vidovics-Dancs First, we present the development of multilateral trading platforms through international examples in our study. In connection with this topic, we describe and compare three already operating multilateral trading markets (the Polish, English and Scandinavian markets). We present the economic and legal background of the Hungarian market and summarise the challenges the domestic SME sector has to face in terms of fundraising. Later, we introduce the participants and the operation of the multilateral trading market through the Hungarian example known as BSE Xtend. JEL codes: G1, G2, G3 Keywords: multilateral trading system, BSE Xtend, small and medium-sized enterprises 1 MULTILATERAL TRADING SYSTEM The term multilateral trading system comes from the term Multilateral Trading Facility (hereinafter referred to as MTF). The term first appeared in an EU Directive known as MiFID in 2004, defined as follows: “a multilateral system operated by an investment firm or market operator, which brings together multiple thirdparty buying and selling interests in financial instruments – in the system, in accordance with non-discretionary rules – in a way that results in a contract” (EU, 2004, 4/15). Based on the above, MTF is an electronic trading system that facilitates the exchange of financial instruments. According to regulations in the USA and Canada, the term Alternative Trading System (ATS) refers to similar platforms2 . In fact, these MTF platforms could be called the “little brother” of disallowed, as they usually enable entering the market and being present in the market under 1 We would like to thank István Máté-Tóth, Deputy CEO of the Budapest Stock Exchange, responsible for trading and business development, as well as Márton Paulovits, Director at Issuers Acquisitions Directorate at the Budapest Stock Exchange for their persistent and helpful work. 2 The two terms are often used as synonyms. Economy and Finance • Vol. 6 Issue 2 • JUNE 2019 • DOI: 10.33908/EF.2019.2.3 190 Krisztián Klis – Ágnes Vidovics-Dancs cheaper and more favourable conditions. Sometimes, it is difficult to distinguish the two trading venues, as stock markets are allowed to operate an MTF (and they do in many cases), but enterprises engaged in investment activity are entitled to operate only MFTs, but not a stock exchange. Even though the term MTF was codified only by the MiFID Directive, MTF markets have existed for decades. The most famous and successful ones are the following: Alternative Investment Market (hereinafter referred to as AIM, the UK, 1995), TSX Venture Exchange (Canada, 1999), Nasdaq First North (Scandinavian countries, 2005), NewConnect (Poland, 2007) and ChiNext (China, 2009). Although the size of European MTF markets still does not reach that of traditional stock markets, in August 2018, the turnover of European premium stock markets amounted to nearly EUR 800 billion, while that of MTF markets was EUR 6.5 billion; it is worth studying such markets. Since 2017, there has been an MTF market even in Hungary. Under the name of BSE Xtend, it enables developed SMEs to enter the stock market under favourable conditions. In Chapter 3, we explain in detail the structure of an MTF market through the Hungarian example. In order to put it into context, we shortly describe three European (Polish, Scandinavian and English) alternative trading platforms, providing some insight into the emergence and development of these European markets. The common feature of these markets is that they seek to provide SMEs with public markets which work similarly to traditional, regulated stock markets, however, offer more favourable terms to new issuers who enter the markets. Such conditions are detailed in Chapters 4 and 5. Polish MTF market NewConnect was set up by the Warsaw Stock Exchange on 30 August 2007 for small and medium-sized enterprises with high growth potential. When establishing NewConnect, AIM, a London-based MTF market, served as an example. NewConnect aimed to provide a realistic alternative to fundraising in the stock market in the SME sector. Technically, this market is regulated similarly to traditional stock markets, however, the criteria for market access and trading are not so strict, and the fees are more favourable (Asyngier, 2014). After the dynamic growth of the initial years, about 400 companies have been introduced to NewConnect over the past few years (see: Figure 1). MULTILATERAL TRADING PLATFORM IN EUROPE AND HUNGARY 191 Figure 1 The number of companies registered in the NewConnect market (2007–2018) Source: a figure edited by the authors Data source: NewConnect (2019a) Nasdaq First North, a multilateral trading system, was launched in Denmark in 2005. In 2006, it was bought up by the Swedish stock exchange, Nasdaq Nordic, therefore its headquarters were relocated to Stockholm. Currently, the structure referred to as the Scandinavian MTF market includes the Danish, Swedish, Lithuanian, Latvian, Armenian and (since 2006) the Finnish and Icelandic capital markets. (Nasdaq OMX Nordic, 2018). In addition to the English and Polish MTF markets, Nasdaq First North is one of the most dynamically developing SME markets of Europe. In May 2019, it had 580 registered companies (Nasdaq First North (2019a). The London-based Alternative Investment Market, which was established in 1995, is one of the oldest MTF markets. AIM, which started only with 10 companies, had already 121 registered enterprises at the end of the year of its foundation. Currently, it is the largest and most successful SME market in the world (London Stock Exchange, 2018a). Figure 2 shows the number of participants entering the AIM market per year. Until the spill-over effect of the crisis of 2008, the number of new companies entering the AIM had been dynamically increasing, reaching its peak between 2005 and 2006. Although the crisis slowed down the growth of the AIM, on average 65 British small and medium-sized companies and 21 SMEs 24 84 107 185 351 429 445 431 418 408 401 385 0 50 100 150 200 250 300 350 400 450 500 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 192 Krisztián Klis – Ágnes Vidovics-Dancs of other nationality have entered this market since then. Based on data from 2018, 942 enterprises out of the 2168 companies of the London premium stock exchange were registered on the MTF market (London Stock Exchange, 2019a). Figure 2 The number of new companies in the AIM market (2007–2018) Source: a picture edited by the authors Data source: (London Stock Exchange, 2019a) The fact that the London Stock Exchange became a major shareholder in Turquoise in February 2010 played a key role in the success of the AIM. Turquoise had been the largest multilateral trading system in Europe. It has a wide European clientele, including emerging markets, inter alia Hungary and the Czech Republic. As a result, it can trade stocks, depositary receipts, exchange traded funds (ETF) of 19 European member countries, as well as the European options of the same number of countries. The members include banks, brokers, stockists and retail intermediaries (London Stock Exchange, 2018b). Currently, the London Stock Exchange is expanding its Real Time Data service in Asia (London Stock Exchange, 2018c). Since 1 October 2018, Asian retail investors can have access to the real time data of the London Stock Exchange through eight licensed traders. The RealTimeData service provides investors with valuable information on securities listed and traded on disallowed, including 197 87 30 75 68 49 78 94 47 55 69 52 87 27 6 27 22 24 21 24 14 9 11 13 0 50 100 150 200 250 300 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 from the UK from the international market MULTILATERAL TRADING PLATFORM IN EUROPE AND HUNGARY 193 the London Stock Exchange and the Borsa Italiana. According to Simon Youdan, Business Development Executive of the London Stock Exchange, the Asian continent is a strategically important territory for the London Stock Exchange, as real-time access to high quality data is essential for those who seek to achieve high exposure to global markets and support the platform with their trading activity (London Stock Exchange, 2018c). In conclusion, Turquoise, which is currently owned by AIM, is the largest MTF platform in Europe, where the stocks of companies are traded. Upon the independent initiative of the Budapest Stock Exchange, an MTF market has been established in Hungary, as well. BSE Xtend is to trade the shares of small and medium-sized enterprises. In the next chapter, we describe why we believe that the introduction of MTF markets is essential in connection with the financing of SMEs. 2 SMALL AND MEDIUM-SIZED ENTERPRISES AND THE MTF Small and medium-sized enterprises face several challenges in the course of their operation. They have to tackle different external and internal factors to maintain and increase their profitability in the long run or to survive. According to Kállay (2012) and Vágány–Kárpátiné–Daróczi (2011), the main challenges SMEs have to confront are the following: • Dependency: Small and medium-sized enterprises depend much more on buyers and suppliers than large multinational companies. SMEs are less frequently considered as strategic partners of high priority, which can be important, for example, during a negotiation about granting a respite for payment. • Low capital supply: Small and medium-sized enterprises often do not have enough equity and/or have liquidity problems. • Funding difficulties: In many cases, it is more difficult for SMEs to obtain external resources (either equity or debt). When taking out a loan, they are usually considered to be risky clients, and face higher interest rates and transaction costs. • Low risk-bearing ability: SMEs cannot take risks or bear to be loss-making for several years. • Tax burden. According to Kállay (2012), bigger companies have to pay lower taxes. In our study, we focus on funding difficulties. The establishment and operation of businesses require capital. SMEs may need to raise funds in order to develop human resources (hire more employees, train their existing employees and hire 194 Krisztián Klis – Ágnes Vidovics-Dancs more qualified workforce) or promote innovation (introduction of new technology), with the usual aim of maintaining or increasing their market share: financing situation is a factor of competitiveness. Table 1 summarises the most important forms of corporate funding.3 Table 1 Corporate financing facilities INTERNAL FUNDING EXTERNAL FUNDING EQUITY Reinvestment of profit Amortisation Transfer of assets Owners’ equity DEBT Bank loan Bond issue Leasing Supplier loan Factoring Source: Table edited by the authors, based on the description of Vasné (2006) In the case of internal financing, the company provides the required resources without external help, while in the case of external funding, its capital requirement is satisfied from external sources, by borrowing from owners or creditors. Public companies can increase capital on the stock market or MTF market by means of public share offering. Several countries face the problem of the economy not being able to exploit the potential of SMEs due to their low or structurally not appropriate funding. In the annual publication of the London Stock Exchange Group on SMEs (London Stock Exchange Group, 2017), financial and economic leaders (such as Toomas Töniste, the Estonian Minister of Finance or Roberto Gualteri, Chair of the Economic and Monetary Affairs Committee of the European Parliament unanimously state that the SME sector constitutes the backbone of the economy and is key for growth, innovation and job creation in Europe. At the same time, it is often mentioned (for example, by Xavier Rolet, the CEO of the London Stock Exchange in the same publication) that traditional forms of funding (typically loans) are not suitable for 3 The collection cannot be called taxative and does not include the so-called mezzanine financing forms at all. MULTILATERAL TRADING PLATFORM IN EUROPE AND HUNGARY 195 the financing of this sector, which would rather require equity-based resources, however, in a more flexible form. In fact, the history of SMEs and the development of MTF markets meet at this point. Several MTF markets were specifically established to provide a financing platform for this sector. The most important feature of the platform is that the SMEs with special growth and innovation potential, which intend to get funding to develop their product or service, issue the company’s shares on an MTF, a so-called secondary stock exchange. They do so because they are still not ready to enter the primary stock exchange, owing to the introduction requirements. The funding of Hungarian small and medium-sized enterprises is dominated by domestic loans and EU grants (HCSO, 2017). After the crisis, the loan volume accumulated over the previous years was dynamically decreased, and then it has been growing again since 2015. According the assessment published by the National Bank of Hungary in 2017, the Funding for Growth Scheme (FGS) largely contributed to the turn, as after its launch in 2013, “the credit institutions participating in the programme concluded contracts amounting to HUF 2811 billion with 39254 micro-, small and medium-sized enterprises” (MNB, 2017, p. 2). Being listed on disallowed is not typical of this sector, though stock market capitalisation cannot be called high in Hungary anyway, as based on the 2018 data of the Global Economy, it made up 22.68% of the GDP (The Global Economy, 2018). Over the past decade, venture capital funds have spread in Hungary, as well, providing an opportunity for SMEs to obtain resources, however, sometimes with such conditions that the enterprises are not willing to fulfil, for example, they do not want to assign rights of ownership and control to the financer. 3 CHARACTERISTICS OF THE BSE XTEND MARKET The most important goals of the Budapest Stock Exchange are to promote the development of the capital market, promote its international competitiveness, ensure its transparent operation, increase and protect the security of investments and expand the opportunities for capital market participant to obtain funds. In view of the above, the Budapest Stock Exchange opened its first multilateral trading system called BSE Xtend in September 2017. Xtend provides opportunities for small and medium-sized enterprises which are planning significant business growth, looking for external financing and are able to fulfil the requirements of the multilateral trading market to enter the capital market and obtain funds. The companies which the Budapest Stock Exchange intends to list on the MTF market “are able to enrich the range of stocks traded in the BSE, evoke the interest of potential investors with new investment stories and their dedicated business ideas 196 Krisztián Klis – Ágnes Vidovics-Dancs and, of course, imagine their future in the capital market in the long run” (BSE, 2018b, p. 1). The companies entering the domestic MTF market face lower fees and less complicated terms, and they also receive special supporters, but under regulated conditions that are similar to traditional stock markets (BSE (2018c). The easier conditions enable them to get used to transparency in the stock market gradually while being able to enter the stock market in a category as “appreciated” as bigger companies. According to Richárd Végh, the President CEO of the Budapest Stock Exchange, the long-term goal of the BSE is to ensure that developed SMEs can develop into professional corporations operating transparently with the support of the BSE (Végh, 2016). The specialty of Xtend and MTF markets in general is that the enterprise issuing shares in such markets is connected with a group of investors, usually called investor pool, by a nominated advisor. Figure 3 schematically presents the relationships between the participants. Figure 3 The structure and contact network of the MTF market Source: edited by the authors POTENTIAL ISSUER INVESTORS NOMINATED ADVISOR MULTILATERAL TRADING PLATFORM IN EUROPE AND HUNGARY 197 One of the most important participants of the multilateral trading market is the issuer, i.e. the small and medium-sized enterprise entering the market. The operation of the MTF market is determined by the potential group of investors (the socalled investor pool) from where the issuers can obtain capital and funds in the in long run. The contact between potential investors and the issuer is established by an important participant, the nominated advisor through the BSE Xtend platform. The nominated advisor continuously supports the issuer not only in entering the market, but also during its market presence, which is a kind of guarantee for the investors. Prior to entering the market, the nominated advisor screens the potential issuer, supports its preparation for the stock market, prepares and implements its capital market transactions. After the transactions, the nominated advisor supports the public operation of the issuer and makes annual declarations on the compliance of the Xtend market with the policy. The regulatory framework of the BSE Xtend market was established by the BSE. Market surveillance is shared by BSE and the National Bank of Hungary. In this market, the BSE is also responsible for checking the information documents required for introduction and determining their content (below a total issue value of HUF 5 million) (BSE, 2018d). 3.1 Potential issuers (developed small and medium-sized enterprises) Over the past decade, the lack of resources in the Hungarian SME sector has been significantly decreased by different EU sources. In this respect, there are several companies which have not been able to accumulate enough capital despite the Funding for Growth Scheme, which prevents the possibility of further development. In the long run, in a less favourable interest rate environment, in addition to loans, opportunities to obtain resources from the capital market are required, as well. The Xtend market, which can be considered the “hall of the stock market”, makes such opportunities available for SMEs, as well, due to favourable conditions. Based on the study of small and medium-sized enterprises in Polish, English and Scandinavian MTF markets, the stock market presence of SMEs is more common in the following industries: telecommunications, IT, software and computer industry, healthcare, financial services, as well as in the petroleum and natural gas industry (London Stock Exchange, 2019a; 2018d). These industries have dynamic development opportunities which can be attractive to capital market investors. It is important both at international and national level that the companies which enter the stock market fulfil the high-level requirements of investor confidence, perform in a stable manner and have a business strategy that ensures growth po- 198 Krisztián Klis – Ágnes Vidovics-Dancs tential. As a result, such companies can expect that investors will be seriously interested in them. The registration of securities in the MTF market can take place in two ways: on the one hand, by initial public offering (IPO), on the other hand, by so-called technical introduction. Technical introduction is an excellent option for those companies which raise capital in a closed circle prior to introduction to disallowed and issue their shares after the capital increase. This public form of appearance is called technical introduction. IPO (Initial Public Offering) means that the shares of the company are sold to institutional investors. IPO is registered by the BSE with the approval of the National Bank of Hungary, introducing the company concerned officially to disallowed. Figure 4 shows the number of IPOs in the Polish, English and Scandinavian markets in 2017. If SMEs pursue a business strategy that complies with market conditions, they can enter the regulated premium or higher category market, as well (Tamborski, 2015). Figure 4 The number of IPOs in some MTF markets in 2018 Source: edited by the authors Data source: FESE (2019) and London Stock Exchange (2019b) 19 41 51 4 42 38 0 10 20 30 40 50 Polish (NewConnect) English (AIM) Scandinavian (Nasdaq First North) 2017 2018 MULTILATERAL TRADING PLATFORM IN EUROPE AND HUNGARY