The Bucharest Stock Exchange (BVB) is becoming increasingly vulnerable to sharp price swings as the effective free float of listed companies continues to shrink, driven by sustained buying from pension funds and exchange-traded funds (ETFs), according to a commentary by Radu Crăciun, vice-president of the Association of Independent Administrators, published by Ziarul Financiar.

Crăciun argued that the widespread "buy and hold" strategy of institutional investors is steadily reducing the volume of shares available for trading.

"The real free float of listed companies has been in continuous decline as a consequence of the 'buy and hold' investment strategy," he wrote.

He added that growing demand for ETFs further reinforces the trend because fund managers must purchase shares in proportion to the composition of the BET index, regardless of company valuations.

"As demand for ETFs increases, issuers of new ETFs are forced to 'cover' them by buying more and more shares to replicate the BET. But these investments are on 'automatic pilot'. They do not take into account the fact that some shares may be overvalued and others undervalued," Crăciun said.

According to the analyst, this market structure could amplify volatility if investor sentiment changes, increasing the risk of a market bubble as fewer shares remain available for active trading.

He also warned that the changing risk profile of the Romanian equity market should be taken into account by policymakers, particularly as legislative proposals are being discussed that would allow investment portfolios to allocate up to 100% to equities.

Crăciun argued that such proposals underestimate the risks of the Romanian market, whose liquidity and depth remain significantly below those of mature markets such as the United States.

The warning comes after a strong rally in Romanian equities. The benchmark BET index has gained more than 80% over the past 12 months and is up around 38% since the beginning of the year, supported by robust inflows from domestic institutional investors and growing interest in passive investment products.