As Serbia prepares to mark the 130th anniversary of the founding of the Belgrade Stock Exchange, the market finds itself on the margins of the country’s financial system, with few representatives of the industry being more closely associated with traditional practices than the lucrative business opportunities often depicted in Hollywood films.
Unlike most commodity and services markets, trading financial instruments cannot be done without the involvement of stockbrokers, a concept that has existed for centuries. The primary purpose of this role was never to grant market participants a monopoly, but rather to ensure the safety and trust of investors. The fact that supply and demand are centralized and trading is conducted through licensed brokers allows a large number of investors to come together to buy and sell intangible, dematerialized financial instruments.
The Belgrade Stock Exchange, founded by wealthy merchants in the late 19th century, originally traded a mixture of goods, securities, currencies and commodities. After experiencing significant growth following World War I, the Exchange lost its purpose after the end of World War II and the collapse of the market economy. It was officially closed in 1953, and although nominal trading resumed in the final decade of the 20th century, the real revival of the Belgrade Stock Exchange began after the political changes of October 2000, alongside the privatization process.
The transitional ascent
At the beginning of the transitional period, the role of the Belgrade Stock Exchange was largely focused on reprivatization, as companies, which had acquired their status as joint-stock entities in the 1990s through ownership transformation, were sold off. In the first few years of the exchange’s activities, most transactions took place between strategic investors (future owners) and individual shareholders who had received shares for free. Brokers played a key role in facilitating the transfer of ownership between these extremely unequal market participants.
On one side were a large number of individual shareholders, “armed” with free shares and the legacy of the 1990s, when money itself often had no real value. On the other side were domestic and foreign capitalists, eager to take advantage of the sellers’ hurry to cash in their shares. Brokers often acted as mere intermediaries, with little desire to inform and educate the sellers, who, to be fair, showed little interest in learning about the new market dynamics.
As the transition process progressed, portfolio investors began to play a larger role in the stock market. These investors were mainly from Slovenia, Croatia, and Austria, encouraged by positive transitional experiences in the region, where the financial markets were more developed than in Serbia. This new class of investors brought higher expectations, which in turn spurred the development of brokerage services. In addition to their traditional role of executing orders efficiently, brokers began to offer clients valuable information, news, analyses, and reports.
The significant rise in trading volumes during the height of the stock market’s expansion—peaking at a record €1.8 billion in 2007—also led to an explosion of new brokerage firms. By then, the number of brokerage houses had surpassed 100, including the brokerage departments of banks. Annual profits for the leading players reached millions of euros, which was an impressive result for firms with just a few dozen employees. According to data from the Securities Commission, the number of licensed brokers exceeded a thousand, and it seemed that nothing could stand in the way of the creation of a strong financial market.
Broken expectations
However, the global financial crisis of 2008 exposed all the weaknesses of the domestic market, which was severely lacking in institutional and investment infrastructure. After the index dropped by 75% that same year, the market never fully recovered. Brokerage firms recorded a dramatic decline in trading volumes, reducing their numbers. Many of those employed in the sector quickly found positions in related institutions such as banks, insurance companies, or in the real economy.
The decline in trading meant that most foreign investors who required higher levels of service began withdrawing from the market. The stock exchange fell into a state of stagnation, choking the business of the industry and leaving the remaining employees disillusioned. The number of people working in the entire stock exchange sector fell below 200, and by the time the pandemic arrived, the number of brokerage firms had dwindled to fewer than 20.
The main clients of the market became the majority owners of local companies, whose primary business activity was purchasing the remaining shares from minority shareholders. In this new market structure, there was little room left for portfolio investors, who were largely wiped out by the second decade of the transitional period. As a result, there seem to be fewer of them today than at the earliest stages of the exchange’s development.
The Shift to Foreign Markets
In the absence of investment opportunities in the local market, brokerage firms turned to foreign exchanges, which has become the only healthy segment of their business in recent years. However, the long-term decay of the domestic industry has crippled its human and technical potential, preventing a faster expansion of business.
Trading on foreign exchanges gained significant momentum during the pandemic, as many local citizens seized the opportunity to enter the global financial markets at discounted prices, and their relative success became the best advertisement for expanding this type of activity. Certainly, the growing interest in foreign stock exchanges was fueled by years of zero interest rates in domestic banks, followed by inflation that wiped out the savings accumulated over the past decade.
Will there be another opportunity for brokers?
While local small shareholders were initially focused on domestic brokerage firms, often guided by company executives, investors participating in the global market now have a wealth of options available to them. The development of financial markets and technological advances have led to the democratization of investing, allowing people to open trading accounts from the comfort of their homes at very low costs. Global discount brokers have covered nearly every corner of the world, and their simplified applications, which often resemble betting slips, easily attract interested individuals.
Local brokerage firms, therefore, have little chance of competing with the efficiency and cost-effectiveness of global e-brokers, who, thanks to economies of scale, can offer commissions that border on zero. However, these online intermediaries do not provide any technical or educational support, which is sorely needed by the average local investor.
This is where the greatest potential for domestic players lies: offering more complex brokerage services, which on foreign exchanges often approach the realm of investment advisory services.
This is the only possible path for the revival of the domestic stock exchange industry, assuming that there are few chances that the strategy for developing the local capital market will result in any substantial breakthrough. Nevertheless, although there is growing interest in investing on foreign exchanges, particularly among younger generations, there is still not enough economies of scale to support the stronger growth of this industry.
