Last week’s column looked at the problem of declining trading volume on global
stock exchanges over recent years, and especially this year. Let’s continue this
discussion by bringing it home to the Tel Aviv Stock Exchange (TASE), where the
problem not only exists, but is particularly acute.
The data are clear
cut and – I’ll spare you the detailed numbers – they show that turnover on the
Israeli equity market shriveled in 2012 much more, in fact about twice as much
than was the case in the world as whole, or in the developed markets of Europe
and North America. However, as noted so often, it is wrong to cite statistical
data out of context, and in this particular case, the context is very
First of all, although Israeli trading volume shrank sharply
this year, in both relative and absolute terms, its relative performance last
year and over the period since the crash of 2008/09, was better than the global
average. Taking into account the longer-term picture, in which Israeli turnover
soared from 2003 onwards, raises the possibility that this year is an
Also, when comparing Israel’s stock market trading volume to
others, a comparison with developing markets seems more apposite than one to
Finally, and perhaps most surprisingly, the data show
that while turnover in equities has indeed plunged, that is definitely not the
case in the bond market. On the contrary, bond volumes have risen this
year to record levels.
In other words, a fuller review of the data forces
one to redefine the question quite radically. It is not merely “why has trading
volume in Tel Aviv fallen twice as much this year as has been the case
globally?” Rather, it is something like: “how come trading volume in Tel Aviv
has plunged davka this year, but not previously, and only in equities, but not
in fixed income – and is this development significant, or is it likely to prove
transient?” Obviously, that is a much more complex question, which is unlikely
to have an easy answer.
It should be noted, before proceeding further,
that Tel Aviv does not suffer from some of the major problems discussed last
week, notably that of HFT (high-frequency trading), in which computers
programmed to buy and sell on the basis of algorithms now dominate trading by
generating massive amounts of orders, in one or both directions, in miniscule
amounts of time.
Nor is there the parallel feeling that the local market
is systematically manipulated by large institutions, giving rise to a loss of
confidence in the entire system on the part of retail
Nevertheless, the retail investor is fading out of the Tel
Aviv scene. That much is clear from the systematic decline in assets invested in
equity-oriented mutual funds – a phenomenon that does mirror the US experience
and is all the more disconcerting as a result.
But the source of the
problem is probably not to be found among the retail investors, but rather among
foreign and local institutions, where it has more to do with insufficient
trading activity than with excessive or manipulative activity.
of thought believes that the decision by MSCI, the most important company in the
field of creating and managing indices of equity or bond prices, to upgrade Tel
Aviv from an emerging to a developed market is the root problem. That decision,
taken in September 2009 and implemented in May 2010, forced all the managers of
emerging market indices to sell out of Tel Aviv – because it no longer matched
In theory, their place should have been taken by managers
of developed market funds, for whom the way was now open to invest in the TASE.
However, the very small weight of Tel Aviv in the major league indices – around
half a percent – made the effort of analyzing the Israeli market and of picking
which shares to buy not worthwhile for many.
Furthermore, MSCI did not
know where to put Israel, because indices are usually based on geographic
regions – Europe, Asia-pacific, etc. – and Israel could no longer be in the
‘EEMEA’ region, meaning Eastern Europe, Middle East and Africa, as it had been
when it was classified as “emerging.” There are no other developed markets in
EEMEA, so there was no group to join.
But, on the other hand, Israel is
not in Europe, so MSCI felt it could not be in the Europe developed market
As a result, Israel is in an index limbo, a situation in which it
cannot attract investment from “passive” funds that track indices on the basis
of the weightings given to each market in them.
If MSCI could be
persuaded to do what the European football, basketball and others organizations
have done, and classify Israel within Europe, that part of the problem would be
solved. It would probably not be a panacea for all that ails the TASE, but it
would do some good and no harm.
It would also be good for the investors
in those foreign funds that bought into Israel. After all, the record is clear
that an investment in Tel Aviv five, 10 or 20 years ago would have generated
much better returns than in virtually any European developed