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Stock exchanges must improve trading model: Norway wealth fund

[OSLO] Global stock exchanges are failing to meet the needs of large institutional traders and are increasingly losing out to private equity when companies seek to raise cash, the world's largest sovereign wealth fund said in a report published on Friday.

The Norwegian Government Pension Fund Global, with assets of US$875 billion, owns about 1.3 per cent of listed shares globally and is also a large investor in bonds and real estate.

In a report on the role of stock exchanges, Norges Bank Investment Management (NBIM), which manages the fund, said while regulated markets are vital to investors, the focus should not only be on the speed of trade but also on how large trades are executed.

"If they are to re-assert their central role, they must adapt and innovate to enhance their attractiveness to institutional investors who have supplanted the many small retail investors that exchanges were originally designed to serve," NBIM wrote.

The fund, which is largely restricted from buying unlisted shares, also expressed concern about a drop-off in the number of initial public offerings in the US and Europe in recent years.

"Exchanges need to ensure that the liquidity risk premium that is available from listings is maintained, versus the increasing amounts of capital available through venture capital and private equity," NBIM said.

"We do not believe economies benefit when going public simply means cashing in, rather than raising capital. We encourage exchanges to develop new solutions in this area, be they in the form of new listing classes, or potentially even a return to local exchanges," it added.

NBIM said some progress had been made on the trading of large blocks of shares, including by the New York Stock Exchange and the London Stock Exchange, such as the introduction of mid-day "batch" auctions, but that more work was needed.

The fund invests about 60 per cent of its assets on the stock market, 35 per cent in bonds and five per cent in real estate, all of it in foreign markets, to pay for future pensions and other costs of Norway's extensive welfare state.