Mike Collier in Riga -

With the small stock exchanges of Estonia, Latvia and Lithuania now part of the world's largest exchange company and firms increasingly taking advantage of "pan-Baltic" membership, the relevancy of these bourses is no longer questioned. However, the lack of any listing yet on the Baltic's alternative market for small growth companies after almost a year shows there's still some way to go before the exchanges can be considered an essential part in the development of the region's corporate sector.

On April 24, the Lithuanian brokerage company Finhill became the 25th company to achieve "pan-Baltic" status on the Nasdaq OMX Baltic stock exchange since the programme started in January 2007 as a way to further integrate the Baltic securities markets. Finhill joins a growing band of firms in the region looking to gain access to a wider investor base by trading simultaneously on all three Baltic exchanges.

From her Valnu iela office (which appropriately translates as "Wall Street"), Daiga Auzina-Melalksne, chairwoman of the Riga stock exchange, makes it clear that a unified Baltic bourse is already a reality.

"The three Baltic states are all really small. After we had a joint owner in OMX we started work on establishing a joint Baltic market. We realised that investors view the Baltic as one investment area. They are not interested in buying 'a Latvian company' or 'an Estonian company,' because to them it's all the same, so we concentrated on building this joint Baltic market. Our main target is that investors view us as a single investment area - and I think we have achieved it," Auzina-Melalksne says. "Now we are working on a joint clearing settlement system and are looking to possibly introduce euro trading and euro settlement. We are currently undertaking a feasibility study so that later this year we will be able to say what the costs and benefits are."

It's taken less than two decades for the Baltic bourses to evolve from bare bones operations to become purveyors of the world's most sophisticated trading platform, she explains. The Riga stock exchange invested a lot of resources in educating companies, managers and the general public about what it means to be on the exchange, the importance of good investor relations, and what might be regarded reasonable expectations from shareholders. Then the Russian crisis of 1998 hit and stocks collapsed, but it also provided a fresh start for a new stock exchange with a better-educated clientele.

While she admits that the Riga exchange is never likely to be among the main indices listed around the world - Riga's average daily turnover for March on equities was a paltry €170,000 - it is actually rather bigger than it seems, Auzina-Melalksne insists, possessing as it does close links to the much larger Nordic exchanges. "All the foreign investors that came in - for example the Icelandic bank NP Investments - gained this pan-Baltic membership. Because we have the same training infrastructure the Nordics have, it's really easy for them to connect. If their clients ask for Baltic securities it's easily done."

Go north

In keeping with the fast-growing nature of its new owner Nasdaq - which completed its merger with OMX in February to create the world's largest exchange company The Nasdaq OMX Group - is last year's initiative to launch a Baltic alternative investment market. First North Baltic is now up and running - though with still no small companies yet taking advantage of its less stringent listing regulations. "We don't have any companies listed yet, but all the legal infrastructure and trading infrastructure is in place," says Auzina-Melalksne.

"The main targets will be companies that are developing very fast, that do not have established operations yet, and need capital. Regardless of the real estate crisis, inflation and so on, companies still need money. If the business is attractive and the management are educated enough to know what is expected, they can attract capital here. We believe there is good potential because if you look at the regulated market there is only a limited number of sizeable companies that can apply because of the requirements. For the alternative market, the potential company base is a lot wider," she says.

EU directives are part of the reason why First North Baltic has been set up. "Compliance with directives is nice, and good - but very costly and not always justifiable. It's one thing for a telecoms company with hundreds of employees to meet the criteria because they can have five people working on investor relations, but if you are a small company, every person counts," says Auzina-Melalksne "Basically the regulatory framework is lighter for the alternative market. There still needs to be transparency and for the alternative market we have set the minimum requirements. We said 'Let's see what investors are asking and let the companies themselves decide what they should do.' There has to be basic financial reporting and information disclosure but we don't want to burden them or kill them."

And the small Baltic exchanges have a significant role to play beyond the daily business of trading stocks. "There are a lot of other things we provide besides equity trading," Auzina-Melalksne concludes. "Government bonds are traded, all the banks have issued mortgage bonds and our clients say that being on the exchange helps because when they are speaking to foreign partners who don't know them, the fact that they are listed and their financial reports are available greatly adds to their credibility.

"As someone once said: A bourse is like opera - you can live without it, but it's better to have it," she says.

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