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STOCK EXCHANGES - This little market went to market

The drive for critical mass and global reach is pushing stock exchanges into merging with each other. Will the single European currency be followed by a single European equity market?

If corporate giants are obsessed with globalisation, the same goesanges into merging with each other. Will the single European currency be followed by a single European equity market? for equity markets. All the indicators suggest a trend towards a future with fewer, more global stock exchanges. The big question is, will there ever be just one global market, and will it be based around any of the existing exchanges?

There are plenty of signals that demand is growing for a pan-European stock exchange, apart from the imminent arrival of the euro. Stephen Kingsley, head of European financial risk management at Arthur Andersen Financial Markets, sees indicators of the future in the way investment analysts are looking at industries across the regions in Europe – comparing BA with Swissair or Lufthansa, for example. Similarly, this autumn Merrill Lynch began trading in European equities by sector rather than by country.

“The next driver is size,” says Kingsley. “As investment funds grow, and they are growing, the critical mass of each holding increases, leaving specialist funds to cater increasingly to small cap companies. What you can see happening is the creation of a large market in large cap stocks across Europe, equipped with its own indices and derivatives.”

In July, the London Stock Exchange and Germany’s Deutsche Borse unveiled plans for an alliance designed to allow investors access to leading, quoted companies in both markets and ultimately, they said, the development of a pan-European stockmarket. Investors will be able to trade in over 100 British and German stocks from a central pool, with the first phase of the scheme scheduled to begin in January 1999. “The feeling is that people want to trade across Europe,” says a London Stock Exchange spokesman.

“They want one market. Member firms have had to pay for 11 or 12 trading systems in 12 countries. They want one harmonised market, one trading platform for the whole of Europe.” This is the first equity link-up in Europe, he notes. “The ultimate aim is to create a pan-European market.”

But Easdaq already claims to be pan-European, so what does the London-Frankfurt link mean for that market? “It shows Easdaq was a bit ahead of its time in the sense of its Pan-European outlook,” says Andrew Beeson, chief executive of Beeson Gregory and an Easdaq board member. However, he points out that the London-Frankfurt move is aimed at the big stocks.

“It’s unlikely to penetrate far down the capital range,” he says, so that Easdaq’s role may not be as threatened as might first appear.

Easdaq has actually earned some grudging respect, if slowly. “Market perception of Easdaq may lag a bit behind reality,” says David Williamson, chief executive of investment banking group Granville. “Most people would disregard it at the moment and say it’s not been a great success. But if you look at the companies on it, it is beginning to become a relevant marketplace. Some companies are choosing it ahead of UK markets.” For example, in October Memory Corporation, designer of proprietary semiconductor devices, announced plans to move from London’s Alternative Investment Market to Easdaq on the grounds that the European market would more accurately reflect the international nature of Memory’s customer base.

Closer contact between exchanges isn’t a European phenomenon. Nasdaq has openly stated its interest in establishing links with other exchanges around the globe. On 2 November, Nasdaq announced the completion of its merger with The American Stock Exchange (Amex). The two exchanges will operate as separate markets under the management of the Nasdaq-Amex Market Group, a new subsidiary of the National Association of Securities Dealers (NASD). The move gives companies choice, says Judith Lacey, associate director in international marketing at Nasdaq. “Under the one umbrella of the NASD, companies can choose whether they think it’s better to be traded on a screen-based system (Nasdaq), or through an order-driven market (Amex), which may be better for smaller stocks.” Market-making, through screen-based Nasdaq, may be deemed more appropriate for companies where there is more trading in their shares. That said, Nasdaq is planning to introduce a central “limit order file”, an electronic noticeboard where investors post orders to buy or sell, so introducing a mix of quote and order-driven trading into the market. Nasdaq is by far the larger of the two markets, with 5,315 companies listed in August with an average market value of $334m, while Amex had 785 companies with an average value of $167m.

“In terms of talking to other exchanges, we are looking at ways of linking pools of capital round the world through technology,” explains Lacey, although she declines to be drawn into any more detail. Rumours that Nasdaq was in talks with the Deutsche Borse were confirmed in the summer when the two exchanges issued a joint statement that a working group of specialists in technology, trading and marketing was being formed to explore “common transatlantic business opportunities”. Lacey says the link between Frankfurt and London does not affect these talks, which are on-going.

Nasdaq has also been campaigning to raise its profile in continental Europe, notably in France and Germany. “We are always talking to companies about whether they want to list,” says Lacey. “We want to go out to investors, to suggest that there are broader opportunities than just their home markets.” In the UK too, Nasdaq has been running a high-profile campaign advertising Nasdaq as “The stockmarket for the next 100 years”. “We have only been around 26 years. Look what we have done. Think what we could do in another 100 years,” says Lacey. “A lot of people say electronic trading is the way of the future.” This is one of Nasdaq’s strengths and the advertising campaign is a way of reinforcing that image. Another Nasdaq soundbite is the aim to be the “Market of Markets”, used to trumpet the Amex merger.

“The Market of Markets approach means that you incorporate as much opportunity and choice into the market as possible,” Lacey explains. “We invite lots of participants, which is good for liquidity. Our job is to make sure that an orderly market is provided. We also try to keep the cost low.”

Nasdaq has aroused the interest of UK high-tech companies. “In the last five years, if you talk to UK companies about a flotation, they always ask about Nasdaq,” says Oliver Baker, Ernst & Young corporate finance partner. “They look to Nasdaq and see the ratings are higher and that’s what attracts them. One of the stepping stones that would help redress the balance in the emergence of a European stockmarket to challenge Nasdaq would be the creation of a body of broker and investor knowledge about high-tech companies. The market could then start to value high-tech companies in a sophisticated way, as Nasdaq does.”

One leading City insider argues that there is going to be consolidation in the number of exchanges. “You are likely to end up with a European exchange, a Far East exchange and one or two American exchanges,” he adds.

Which of the current exchanges could take on that role most effectively is still a matter of guesswork. In the US, Nasdaq and the New York exchange are obvious contenders. London must stand a good chance in Europe, as does Frankfurt.

Whatever the final number of exchanges, the general globalisation trend in all areas of business will have its repercussions. “You have global companies and they expect to be able to raise capital anywhere in the world, and the technology is emerging to enable you to do this,” says the City insider. “Personally, in the end, I think there will be one exchange.

The issue is, when? It won’t be overnight, but we are seeing the start of it now.”


If a global or pan-European stockmarket does emerge for the large investors and large companies, what about smaller quoted companies?

“In the medium term we will see the trading of these stocks remaining a largely national concern in each territory,” says Stephen Kingsley of Arthur Andersen Financial Markets. “Exchanges will encourage trading and encourage new companies into the sector. That will remain quite a national thing, though we are seeing the emergence of brokerage capability on a regional basis.” Easdaq could meet demand from smaller companies looking to float.

“Although companies are tending to use their local markets, those in smaller countries are attracted by a market that’s not associated with any of the big countries,” says Andrew Beeson, chief executive of Beeson Gregory. As for investors, there is general agreement that institutions seeking exposure to small companies will act through specialist vehicles.

“Small cap companies will be the preserve of specialist investors,” says David Williamson, chief executive of Granville. That could be done on a national basis, but Williamson speculates: “I think the pan-European approach will probably affect small companies too, although it may take a bit longer.”

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