From Wall Street to Red Square: The Birth of the RTS

Foreword by Bernie Sucher

Anyone who has ever worked on a trading desk knows the morning ritual. Coats flung over the chair, coffee in hand, tapping in the codes and powering up the machines that magically link you to the pulse of the planet. In the first hour, the big room remains dark. The earliest arrivals, traders and salespeople who will soon be flying at each other on an adrenalin high denied mere ordinary office workers are, at this hour, respectful, open-handed, even gentle.
By the spring of 1996, I had enjoyed this routine for over a dozen years, in trading rooms from New York to Hong Kong and Tokyo to London. But the last six months had been something special. Mornings at Troika Dialog were no longer just about plugging in and prepping for the day’s joust with Mr. Market. No. Our mornings were now jewels of life’s blessings crafted by the canny wisdom and New York wit of Mr. Fred Berliner.

Fred’s recollection of his contribution to organizing the Russian equity market follows. The reader not familiar with those days will nonetheless readily recognize that today’s institutions are the direct descendants of the remarkable effort Fred led nearly twenty years ago.
Even then, we knew how we lucky were. Alexei Dolguikh, Rufat Askerov, Liz Weiss, Alexei Chistyakov, Peter O’Brien, ... On the desk in our offices behind the notorious bulk of Petrovka 38, those marvelous mornings of learning and laughter. We were all students of a master, the true father of Russia’s stock market, Fred Berliner.

In July of 1994, 15 of Moscow’s leading brokers were assembled for a meeting at the Radisson and informed that through the benevolence of Uncle Sam and USAID’s capital markets project, KPMG had been granted a contract to install an electronic trading system that would greatly enhance their market. Their cooperation was essential for this project to succeed. I remember looking around that large U-shaped table, at mostly young, eager men not yet 30, as they uncomfortably and warily eyed some of their competitors for the first time. They hadn’t a clue as to how radically their marketplace was about to change, and none of us could have anticipated or predicted then the rapid emergence of the Russian equities market.

When privatization began, the justifiable conventional wisdom was that companies were priced at a fraction of Western market valuations. For those who knew enough about this embryonic market, even taking the risk into account, the investment opportunities were very attractive. As with all good things, eventually word got out that there was money to be made and the wave started to build. Share prices, which had risen slowly but steadily, started to gain some momentum, publicity soon followed, and by early summer the stampede was on. Articles discussing the efforts of well-known large funds to raise capital for investment in Russia began to appear in the press with increasing frequency. The two main movers of markets, fear and greed, grew ever more powerful, as those who weren’t invested dreaded missing the party and threw prudence to the wind while those who were in banked on a rocket-ship ride to Croesus’s kingdom.

In August, shortly after the fateful Radisson meeting, I was in a broker’s office and overheard a phone call from a Western money manager who was begging to buy an energy stock. The price barely mattered–he just couldn’t wait any longer, the train was leaving the station and he wasn’t on it. Unfortunately for him, he made it. Stock prices nose-dived in early September when all Western buying suddenly evaporated, which turned out to be a blessing in disguise. Until then, most Russian brokers and traders had only given lip service to the changes necessary in the marketplace. They had all made a ton of money in a market that had gone straight up since early 1993. Educated youngsters, in their mid twenties to thirties, who a few years prior didn’t have a kopeck to their names or know a stock from a latke were now full of recently acquired wisdom and hubris, completely lacking the humility that comes with experience.

Moreover, the monetary situation didn’t inspire confidence. The ruble was falling against hard currencies on a daily basis, and in the business world, whether concerning securities, real estate or commodities, Russia’s currency was treated like a leper. By early November 1994, there was still plenty of stock for sale but few buyers. Stock prices sagged. Local seers thought the market cheap, but found few believers so the market continued to decline. By the end of November the market was poised for the event that would trigger a mass exodus – the final violent purge that would set the stage for a market bottom.

In mid April 1994, I was working as a trader when I got a phone call out of the blue asking if I was interested in working and living in Russia. I remember replying that I had never given it an ounce of thought, but agreed to continue the discussion. I had completely forgotten that I had answered an obscure ad in the Wall Street Journal months earlier with a note, sans resumé, and now I was caught up in a net cast by KPMG to find candidates who might help fulfill their recently won contract. It was arranged that I would receive a call that weekend from the head of the project, who was in Moscow at the time. I was vaguely familiar with him as he had tried to hire me 10 years earlier to run the trading operation at a medium-sized member of the NYSE. I was offered what was purported to be a six to nine month assignment, and my wife, who was a Russian major in college, and I both agreed it was an adventure we couldn’t pass up.

And so I became part of a team assisting the Russian government, Russian security brokers and the financial community in establishing a stock market that would be consistent with international standards. There were several USAID, World Bank and other philanthropic projects underway in Russia at the time, and some operated in conjunction with ours. Our group consisted of men and women with backgrounds in management, telecommunications, logistics, compliance and both American and Russian law (to the extent that there was Russian law). At our first meeting in the spacious Moscow apartment of the project head, I lay flat on the floor as I had thrown my back out on my arrival. I am sure everyone was wondering (a fact later confirmed) who the bozo was lying on the floor during this initial powwow.

Most of the original group scattered after more than a year together, but we all shared a special feeling for each other. We understood that the level of camaraderie we enjoyed during the project was truly a once in a lifetime professional experience. My main role was that of a live trader, one who had been on the equity market firing line and could relate to the needs of market participants. This was a new role for me, because I have always been a player. Now I was the coach, using my experience to try to impart to the trading community some idea of how the arena would evolve. Before this mission I had never once considered what factors characterized a workable stock market. I never questioned what series of events relied on each other for the successful completion of a transaction, or how vital telecommunication was to the structure of the marketplace. A viable equities market was of utmost importance to Russia since the country desperately needed capital to finance the restructuring of industry from state to private ownership.

Where were we even to begin? The systems in place were barely functional and archaic at best, and every procedure had to be modified. What existed was an extremely elementary bond trading platform totally unusable for equities. The contract agreements between brokers were night- mares. There were so many variables involved in the contractual agreements that it took the patience of Job and Cassandra’s vision to sort everything out. In the U.S., trades settle (meaning stock is paid for by the buyer and delivered by the seller) in three business days and most are done by “book-entry”. This means the transaction is handled electronically, including the transfer of ownership in the company’s stock registry. In Russia, there were no standards and every point was negotiated at the time of the trade. These points included when the trade would settle and where, whether the stock would be delivered in the buyer’s name before payment was made, where payment would be made and in what currency, and importantly, who would handle the registration of the security with the company’s registrar.

Moreover, registration was not an easy task since it required someone hopping on a plane, train or mule to stand in line at the company registrar, which might be open only on the third Tuesday of each month between 11 and 11:15 AM. A month or more could pass between the verbal agreement to buy or sell a security and actual completion of the transaction – and all of the multitudinous variables affected the transaction price to such an extent that it was difficult to quote a firm price for a given stock. The computer technology was there, but there were no systems in place to standardize and track all this information, such as a central clearing organization, and adaptation to Russia’s particular way of doing business would be a long and tedious task. Compliance in the U.S. generally means playing by the rules established by various industry governing bodies and everyone’s favorite watchdog, the SEC. In Russia, the few rules that existed were broadly interpreted and changed frequently, while the watchdog seemed to be relatively toothless.

Another huge problem was taxes. Many transactions took place “offshore” to avoid the authorities. Russian brokers sold to their own offshore accounts for little or no profit and no tax liability, and then, from Cyprus or another agreeable jurisdiction, would sell the stock at a profit to the real buyer. Actual ownership of the said securities was another problem. If trades were made by CS First Boston or another well-known Western brokerage company, the name alone often guaranteed the trade even though the cumbersome process of re-registration had yet to take place. That meant that there was a possibility of a huge short position developing, which was illegal in Russia at the time. Western mutual funds, especially small partnerships and hedge funds, had the leeway to trade stock like this, but industry giants like Fidelity have strict rules about proven ownership of securities; and without these elephants prowling the jungle, the large-scale growth so eagerly anticipated would not be possible.

All these complications, unfortunately, were linked to each other and our project. Virtually giving Russia the infrastructure of a securities market was proving to be very difficult, and the selection of an electronic information and trading system was needlessly delayed for several months by infantile haggling. Two choices were available. One was a Russian-designed system for trading treasury notes that was jury-rigged to accommodate stock trading. As an alternative, we offered the specifications for Portal, a NASDAQ-type trading system, and at the end of 1994 the system was chosen by the brokers. Portal was a system designed by NASDAQ to trade restricted securities in the U.S., and basically was a flop gathering moss until it was resurrected by interest from the Russian market. There was no doubt that the system had to be upgraded, modified and customized, but for Russia and its stage of development at the time, the system was ideal. One crucial enhancement was creating a window to negotiate trades in Cyrillic, not easy but doable. There was a spirited debate with Dmitri Vasiliev, the head of the newly formed Russian Securities Commission, regarding symbols using the Latin alphabet and price quotations in dollars. After I patiently explained the investors came from the States and Europe, and their initial comfort level was the most important factor in the system’s success, Vasiliev reluctantly acquiesced. I was later reprimanded for speaking so directly and forcefully to him, but my modus operandi served the project well.

The problems with telecommunications were mind boggling. Getting through to various brokerage firms in Moscow was frustrating, and the implications for business were obvious. Telephone systems for military use were fine, but in Soviet times the government didn’t want to make it easy for the common comrade to exchange ideas, so that part of the country’s infrastructure was purposefully neglected. We installed seventeen direct lines, expensive but necessary, to the temporary Portal computer site for the Moscow broker’s association. But in two months we needed many more, so the logistics were intricate. Selecting, or rather finding the site for the pad (a communications concentrator that takes in data, sends it on to the computer, and returns the info to the many individual computers) was a major hassle that we should have better anticipated. Locating any site was difficult enough, but the politics involved made the situation even more complicated. The federal government was at complete odds with the city of Moscow and Mayor Yury Luzhkov, who ran his town with an iron hand and had a payoff machine with few rivals anywhere. We wanted to locate the central computer and the pad adjacent to each other at the Moscow Telephone building, where the telephone lines were the best in the city. However, the greatest fear was that the mayor would be able to hold the whole securities market hostage. The notion that the city could end up controlling the securities market nixed that set-up, so the Stratus computer was located two blocks away in the temporary offices of the Russian SEC. We believed that Luzhkov would hesitate messing with the federal government as opposed to a semi-private telephone company. We needed pads in other cities, plus the ability to hook all this to the central computer in Moscow. That meant at least 150 individual contracts had to be written and blessed by the legal beagles from a significant number of organizations. It was like going to bed at ten o’clock, waking up to a bad dream at eleven, and knowing that before dawn the process would repeat itself many times.

We formed self-regulatory associations in Moscow, St. Petersburg, Yekaterinburg and Novosibirsk to write the rules and regulations for the markets. It was our intention to preempt government legislation that might be written by bureaucrats with little knowledge or understanding of what a securities market is. A standardized contract with four basic options was blessed by the Moscow and regional broker dealer associations, and it eliminated delays in the actual settlement of transactions and facilitated interregional trading. The stage was now set for one national market with a level of transparency that was previously non-existent.

During the six months before the Moscow brokers went online with the new, upgraded system in June 1995, we had to focus on instilling the rules and trading practices commonplace in the West, but unheard of here. Everybody was so hooked on indicative prices that to have market makers quote prices on a screen and then actually honor them was a novel idea, as well as an extremely difficult sell. The reporting of trades was another major hurdle that had to be overcome. Brokers were afraid that if they reported all their transactions, their customers in the West, and their competitors here would realize, rather than suspect, that the markups and markdowns were huge. The rules they wrote read that only trades between members should be reported, so if you had a trade with any customer, be it a Western fund or broker, or a Russian bank, you were off the hook.

I emphasized that all trades were real transactions with money being exchanged for securities and should therefore be reported, but I temporarily lost that battle. In March of 1995, I participated in a meeting of the newly formed trading committee, where the mood was grim. Volume and activity were at a standstill, and most of the members were convinced that the trading system was a waste of their time and someone else’s money. They said, “Why don’t we scrap the whole project, it won’t work.” Three weeks later, the same cast concurred that they were getting many inquiries from known and unknown brokers in Moscow as to how they too could get access to the system. A heated discussion then erupted as to how many terminals each member would be allotted. I knew we had our converts and the Russian Trading System was officially born. By the end of July 1995, the trading system was functioning not only in Moscow, but in St. Petersburg, Novosibirsk and Yekaterinburg as well. In a year’s time, a fragmented, indicative priced market had changed to a national market with hundreds of system users displaying real prices, reported transactions, and for many issues, a depth of market makers rare in emerging markets.

So what did the triumph of the RTS do for the equities markets in Russia? First and foremost, the RTS has been the key ingredient in the success and spectacular growth in stock trading. Without it, Russia would have been on the fringe of the equity business. The RTS became the basic, required tool.

A major accomplishment that can be attributed to the RTS, and the broker dealer associations which supported it, was a significant increase in the level of integrity and standards. When I arrived in June of 1994, about 50% of transactions were never completed following an oral agreement – laying down on a trade was a common and expected practice. A year later, based on the threat of being banned from the system and a general elevation of ethical principles, almost all oral agreements were honored. The investing public benefited from narrowing spreads facilitated by the creation of firm and more liquid markets. From the onset, brokers and traders were told that spreads would narrow considerably and competition would intensify. That caused initial resistance to the whole concept of a trading system; but they were also promised a colossal increase in volumes and trading activity that would more than make up for the shrinking margins. Mercifully, this came to pass, as daily reported volume and the number of trades reported increased 10 times from July of 1995. I had immersed myself in an enterprise that would directly benefit others. I put the Russian’s interests first and gave frank and non-political opinions. Such counseling garnered the respect and confidence of the brokerage community and slowly opened the avenues of accessibility that were so vital for the success of the project.

The trading system basically spawned the broker dealer associations that have become an integral part of the securities industry today. These associations have written, rewritten and transformed the rules, and are continually upgrading standards and practices. The learning curve was very steep and they did an extraordinary job in two short years, but they have proceeded to govern and regulate their members without the benefit of experienced counsel. The second-year students were teaching the class, and there were some petty rules and regulations created that hindered the development of the marketplace. Because of the trading system’s success, the Securities Commission had a much more focused goal of creating plausible, workable, quality regulations that would complement rather than hinder the development of the Russian equities market.

The creation of the Russian Trading System was a marquee success story in the annals of USAID projects in Russia, and perhaps worldwide. We achieved huge, concrete, tangible results relative to the money invested. We had a thriving equities market that couldn’t have been created without the young, Russian entrepreneurs seeking a higher standard than that which evolved from the voucher days. Their desire to change, to overcome the fear of the unknown and greet an unsettled future with an enthusiastic spirit, was the wellspring of this success.
What I was engrossed in for 18 months wasn’t work. I was myself, virtually unfettered and unmindful of protocol as the spirit and trading experience behind the crucial part of the project, and its success sits at the pinnacle of my career. The most difficult obstacle we had to overcome was the natural resistance to change, and our great challenge was to make the Russian brokerage community believe that the trading system and the inevitable, structural upheavals it would entail were beneficial. The single, most important achievement in this process was convincing market participants to make firm, real markets – and to honor them.

Towards the end of the project, I was enormously gratified when the New York Times published a letter to the editor I had written. For too long, I felt, the Russian market had been unfairly portrayed in the Western press and I set out to address these misapprehensions. I had previously sent a similar version of the letter to Barron’s by email, which was promptly published. However, the editor had butchered its content according to his perceptions, and exorcized the flavor and my intent, which was to showcase Russia’s considerable achievements in creating a functioning stock market. And, of course, no one noticed, because I didn’t receive one single acknowledgement of my literary achievement. Obviously, I was the only reader of Barron’s Letters to the Editor section! A pissed puppy, I sent the letter to the New York Times, and just to prove that the left hand often hasn’t a clue to what the right hand was doing, I sent the exact letter to the Wall Street Journal in Europe, the parent of Barron’s. Complicating matters was my disregard of USAID’s strict rules regarding contact with the press, following two unacknowledged attempts to gain official permission. I was also unaware that I was also contractually required to get the Resource Secretariat’s (Russian government’s) approval prior to any communication with the press. But the die was cast, and when the Times called Moscow to inform me of imminent publication, I prepared for the storm. The response to the totally unedited story in the Times was unanimous acclaim and appreciation from all parties. My letter was the rare positive spin about Russia – and it was the truth. The Wall Street Journal Europe published a slightly edited version a few days later (they couldn’t help themselves), but the coup de grace was a translated Times version in the popular Russian daily Sevodnya.

In July of 1994, I met Ruben Vardanian at one of the initial meetings with the Russian brokerage community. He was the 25-year-old President of Troika Dialog, a small brokerage company that he had started a few years earlier. We hit it off immediately and he implored me to join him at Troika. I told him I had a commitment to the USAID project, but when it was successfully completed, I wouldn’t go anywhere else. I joined Troika in November of 1995. Now I had another mountain to climb, and achieving the goals I established for Troika and myself was a challenge, handicapped as I was by a level of Russian on the fair side of pathetic. During my tenure with USAID, I always had at least one interpreter at my side, and often at important meetings I had an interpreter on each side. My role at Troika was trader, teacher, mentor and visionary to a fast growing, young Russian brokerage firm of which I was the senior citizen. I was given free rein over equity trading and its small staff, all young enough to be my children. I vividly recall the first two days on the trading desk. The market was dead, dead. There was virtually no activity and everyone was glum. I asked the traders and sales force what their clients wanted to do and they all said buy, but at lower prices. To me that was like a bell ringing as the market was sold out.

Initially, the sales force consisted entirely of expats, but the traders were and would remain Russians, some with a rudimentary command of the English language. When I was still with USAID, I was responsible for creating all the four letter symbols for securities to be listed on the RTS. Those symbols are still in use today, along with the nicknames created by our desk. SNGS, Surgutneftegaz, became “Snigs”, LKOH, Lukoil, became “Luke”, and there are many more.

Over the more than three years that I ran the equity desk, my command of the language progressed to learning numbers in Russian and developing the ability to referee squabbles on the trading desk; but my traders learned Western adages and became proficient in English as well as much language painful to the politically correct. But most importantly, Troika evolved into the premier market maker for the burgeoning equity community and eventually became the top broker in Russia. I also assumed the role as policeman for ethical standards and fair practice among all Moscow market makers. I played an instrumental role, by example, in forcing the market makers to narrow the spread between the bids and offers and to honor those markets if they were called upon. Clearly, my greatest concern was the integrity of the marketplace, which I zealously guarded.

So, an assignment that was supposed to last for less than a year turned into a five-year love affair. I had no expectations in traveling to Moscow, and could not even have speculated that I would be making a serious contribution to establishing a Russian securities market, both with USAID and Troika. But the most satisfaction is that I was able to a make a real difference to so many, and I am very proud and honored to have been a part of the community.