TCS Daily


Betting on the Future

By Jeremy Slater - March 20, 2003 12:00 AM

If you had asked most traders or investors three years ago to predict how many European securities markets would still be in operation by 2003 you probably would have been surprised by how low the number was. As it turns out, however, a lot of these markets continue to exist despite a recent drive toward consolidation.

At a time when investors are looking for more efficient, international platforms for trading, nearly every European capital still clings to that supposed symbol of economic influence and vigor: the local stock exchange. But the idea that every European country should have its own bourse is as anachronistic as the idea that each European country should have its own airline.

National pride should not trump pragmatism, and there are some promising signs the trend is reversing. For example, this week NASDAQ Deutschland will launch in Berlin, where it will position itself as a consolidated trading platform for German investors after the demise of the high-tech Neuer Markt exchange.

The new NASDAQ exchange could offer a twist on the consolidation trend, serving up a product that others in Germany and across Europe cannot match. Since the system is designed to guarantee best execution and best price for trades, it could lure investors irrespective of the current market climate.

A few years ago, at the time the aforementioned question would have been asked, a millennial fervor had hit the markets. With each major increase in stock prices there was talk of takeovers in almost every sector, including those between the various bourses of Europe. Those promoting the deals argued that such consolidations benefit not only the companies listed on the hyper-exchanges but also their investors, as the cost of trading would be reduced. Trades would be easier and quicker to execute across shared platforms.

The target of much of this speculation was the London Stock Exchange, Europe's largest market for stocks and shares and equal to the combined strength of Frankfurt's and Paris's bourses. In early 2000 a bid was made by the OM Group, which ran the Stockholm exchange, to buy the LSE. It was audacious as the OM Group was much smaller than its London rival and the challenge smacked of wild takeovers of the late 1980s when reverse buyouts were as fashionable as anything in black.

Part of OM's justification for mounting the takeover bid was that it had the most up-to-the-minute trading platform in Europe, which would benefit both big and small investors But OM failed to persuade enough institutional investors that it had the firepower to carry through the bid and it collapsed.

However, the markets were still excited by talk of consolidation and it only seemed a matter of time before a European super-exchange was created - despite the concerns of some national governments and certain parts of the business community.

Governments were worried that the makeup of the new exchanges would be too international and would not allow as many national companies to appear on the new indexes. If you take a look at exchanges in London, Paris or Frankfurt many of the listings are domestic and there was a concern that these companies could lose out.

Despite such fears it seemed market forces would force through consolidations. This certainly seemed to be the case when Deutsche Boerse opened up talks with the LSE in the spring and summer of 2000. Again the selling point was that transactions would become cheaper because of the volumes of trade generated and the speed of using similar trading platform software. However, after a fruitful start to the talks, negotiations began to collapse as seriously sized egos belonging to the major interests in London and Frankfurt voiced doubts. Significant players in London such as Brian Winterflood of Winterflood Securities expressed concern that the deal amounted to a German takeover, a thought that did go down well with certain members of the LSE. Senior players in Frankfurt also said the deal would be unworkable.

At about the same time the bourses in Paris, Brussels and Amsterdam were able to form a transnational market known as EuroNext. The three bourses have specialized with Paris dealing in blue chip companies, Brussels handling secondary listings and Amsterdam selling derivatives. So far, the triumvirate has held together, although the heady talk of three years ago about other smaller bourses joining EuroNext has not resulted in any newer members.

Spurred on by the hyperactivity in the financial markets the European Commission started to study how new legislation might increase co-operation among Europe's many bourses. This followed a March 2000 summit at which EU leaders announced that Europe should become the world's most dynamic and efficient knowledge-based economy by 2010.

The Commission found that US markets had outperformed European ones in the 1980s and 1990s largely because of their greater liquidity. It concluded that Europe could benefit from higher growth if trading in securities, bonds and derivatives was made easier no matter where the buyer was based. The EU's executive body devised what is known as the Financial Services Action Plan, a raft of measures designed to make trading easier in the EU. However, some of these proposals have met with severe resistance from the financial industry. Among them is a proposed directive on common prospectuses, which after a barrage of criticism from investment banks in London and Frankfurt was hastily redrafted to gain a grudging acceptance from Europe's financial community.

Other proposals have had a less inflammatory effect and it is expected that many of the Commission's ideas for opening up Europe's securities markets will be in place by 2005. But in the meantime, it will be up to innovators like NASDAQ Europe to lead the way.
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