Although still under-developed, Russia's stock market has come a long way over the last four years. As organized trading continues to evolve, two stock exchanges should stand out.

By far the most popular method of trading stocks is through the Russian Trading System (RTS), which is further broken down into two tiers. The RTS-1 includes more liquid and larger capitalized companies. The RTS-2 lists relatively illiquid shares that meet less stringent RTS requirements. It should be noted that the RTS-1 and RTS-2 are expected to merge in the autumn of 1998. Basically, the RTS works similar to the NASDAQ in the United States. Dealers post firm prices on computers but often end up negotiating a transaction price somewhere within the spread. Although the clearing system and registration process in Russia are improving, they can still be timely and subject both buyers and sellers to an extended period of counter-party risk. The process of re-registering shares usually takes anywhere from 3 to 15 days, depending on which registrar the stocks are associated with. On a "healthy" day, over $100 million will exchange hands on the RTS.

 Looking to challenge the RTS in equity trading is the Moscow Interbank Currency Exchange (MICEX). The MICEX was founded in 1992 as the official market for currencies and government securities. Total trading in these two areas (currencies and government debt) was more than $600 billion in 1997. In March of 1997, the MICEX was licensed to trade in corporate securities and has displayed impressive growth in this area ever since. After starting with only three companies and daily volumes under $300 thousand, the MICEX now consists of thirty issues* and averaged $22 million per day in March 1998. In comparison, the average daily turnover on the RTS during March 1998 was $88 million. It is also noteworthy that in April 1997, the MICEX accounted for only 1% of total equity trades conducted on the RTS and MICEX exchanges. However, by March 1998, MICEX accounted for 20% of total equity trades on the two exchanges. This sharp increase in activity on MICEX's corporate exchange was not necessarily at the expense of the RTS, as volumes on the RTS increased substantially over the last year.

 There are numerous advantages that the MICEX has over the RTS. First, prices are order driven in that the system will automatically match similar "bids" and "asks" (thus providing an equal playing field for traders). Second, custody and registration are much simpler and quicker by using MICEX. On the MICEX, shares are registered at the end of each trading day. Third, smaller investors have greater access to the MICEX in that shares tend to be more liquid, and the number or value of shares is less prohibitive than on the RTS. Most brokers require a minimum investment of $20-30 thousand to trade on the RTS in order to buy standard lots. Furthermore, a typical transaction on the RTS averages from $70 to $90 thousand. Due to the larger lots that characterize the RTS, it is fairly difficult for small and mid-size investors to diversify their holdings. Over the MICEX, investment sizes in individual securities can vary greatly, but smaller investors and smaller packages are generally represented. The average size of a transaction on the MICEX is currently about $15 thousand. However, it is possible for an investor with under $20 thousand to achieve a somewhat diversified portfolio by trading on the MICEX.

 The MICEX may be the future model for trading Russian stocks, but it currently has many drawbacks. First, investors are required to deposit 100% before trading on MICEX's stock exchange. As a result, investors face potential opportunity costs by leaving their funds on MICEX while waiting to hit a specified price. Second, trading terminals are considerably more expensive, and brokers inevitably pass along some of these higher cost to their clients. Third, the number of corporate equities listed on MICEX is not as broad as those offered by the RTS. Thus, MICEX traders are limited to a fairly small selection of stocks. Whereas the RTS currently lists 351 issues (108 on the RTS-1, and 243 on the RTS-2), only thirty issues are listed on the MICEX exchange. MICEX officials plan to increase the list, but few specifics have been mentioned.

 A problem facing both the RTS and MICEX is that trading volumes are low in Russia, even when compared to smaller emerging markets. For example, Turkey's Istanbul Stock Exchange has recorded $800 million in turnover for one day. In contrast, if the daily volume of trades on the MICEX and RTS reached over $150 million, it would be considered very strong. In addition, all issues listed on the MICEX are also listed on the RTS. Thus, only a handful of stocks (such as Unified Energy Systems, LUKoil, Mosenergo, Rostelecom, Surgutneftegaz, and Irkutskenergo) dominates trade activity on both Russian exchanges in that they account for over 70% of all trades. The question of whether arbitrage opportunities between stocks that are listed on both the MICEX and RTS is currently being explored.

With over 4,000 Russian companies having offered shares to investors during Russia's privatization efforts over the last few years, there is definitely room for both exchanges to expand their listing and co-exist peacefully. The MICEX may be quicker and easier, but brokers and banks are not likely to relinquish their influence over Russia's financial markets as obtained by their activities on the RTS. In all likelihood, the RTS and MICEX will become Russia's version of the NASDAQ and NYSE, respectively. However, Russia's pressing economic issues such as political stability, shareholder rights, taxation, non-payment concerns and the continuation of reforms must first be addressed before either exchange can start living up to its potential.

 OPM-Bank actively trades on both the RTS and MICEX.