are tables showing the trading on several different exchanges in listed
options—primarily options to buy or sell common stocks (call options and
put options). There are futures prices— commodity futures and also interest
rate futures, foreign currency futures, and stock index futures. There are
also options relating to interest rates and options relating to the stock
index futures.
6. EUROPEAN STOCKMARKETS–GENERAL TREND
Competition among Europe’s securities exchanges is fierce. Yet most
investors and companies would prefer fewer, bigger markets. If the
exchanges do not get together to provide them, electronic usurpers will.
How many stock exchanges does a Europe with a single capital market
need? Nobody knows. But a part-answer is clear: fewer than it has today.
America has eight stock exchanges, and seven futures and options exchanges.
Of these only the New York Stock Exchange, the American Stock Exchange,
NASDAQ (the over-the-counter market), and the two Chicago futures exchanges
have substantial turnover and nationwide pretensions.
The 12 member countries of the European Community (EC), in contrast,
boast 32 stock exchanges and 23 futures and options exchanges. Of these,
the market in London, Frankfurt, Paris, Amsterdam, Milan and Madrid–at
least–aspire to significant roles on the European and world stages. And the
number of exchanges is growing. Recent arrivals include exchanges in Italy
and Spain. In eastern Germany, Leipzig wants to reopen the stock exchange
that was closed in 1945.
Admittedly, the EC is not as integrated as the United States. Most
intermediaries, investors and companies are still national rather than pan-
European in character. So is the job of regulating securities markets;
there is no European equivalent of America’s Securities and Exchange
Commission (SEC). Taxes, company law and accounting practices vary widely.
Several regulatory barriers to cross-border investment, for instance by
pension funds, remain in place. Recent turmoil in Europe’s exchange rate
mechanics has reminded cross0border investors about currency risk. Despite
the Maastricht treaty, talk of a common currency is little more than that
Yet the local loyalties that sustain so many European exchanges look
increasingly out-of-date. Countries that once had regional stock exchanges
have seen them merged into one. A single European market for financial
services is on its way. The EC's investment services directive, which
should come into force in 1996, will permit cross-border stockbroking
without the need to set up local subsidiaries. Jean-Francois Theodore,
chairman of the Paris Bourse, says this will lead to another European Big
Bang. And finance is the multinational business par excellence: electronics
and the end of most capital controls mean that securities traders roam not
just Europe but the globe in search of the best returns.
This affects more than just stock exchanges. Investors want financial
market that are cheap, accessible and of high liquidity (the ability to buy
or sell shares without moving the price). Businesses, large and small, need
a capital market in which they can raise finance at the lowest possible
cost If European exchanges do not meet these requirements, Europe's economy
suffers.
In the past few years the favoured way of shaking up bourses has been
competition. The event that triggered this was London's Big Bang in October
1986, which opened its stock exchange to banks and foreigners, and
introduced a screen-plus-telephone system of securities trading known as
SEAQ. Within weeks the trading floor had been abandoned. At the time, other
European bourses saw Big Bang as a British eccentricity. Their markets
matched buy and sell orders (order-driven trading), whereas London is a
market in which dealers quote firm prices for trades (quote-driven
trading). Yet many continental markets soon found themselves forced to copy
London's example.
That was because Big Bang had strengthened London's grip on
international equity-trading. SEAQ's international arm quickly grabbed
chunks of European business. Today the London exchange reckons to handle
around 95% of all European cross-border share-trading It claims to handle
three-quarters of the trading in blue-chip shares based in Holland, half of
those in France and Italy and a quarter of those in Germany—though, as will
become clear, there is some dispute about these figures.
London's market-making tradition and the presence of many international
fund managers helped it to win this business. So did three other factors.
One was stamp duties on share deals done in their home countries, which
SEAQ usually avoided. Another was the shortness of trading hours on
continental bourses. The third was the ability of SEAQ, with market-makers
quoting two-way prices for business in large amounts, to handle trades in
big blocks of stock that can be fed through order-driven markets only when
they find counterparts.
A similar tussle for business has been seen among the exchanges that
trade futures and options. Here, the market which first trades a given
product tends to corner the business in it. The European Options Exchange
(EOE) in Amsterdam was the first derivatives exchange in Europe; today it
is the only one to trade a European equity-index option. London's LIFFE,
which opened in 1982 and is now Europe's biggest derivatives exchange, has
kept a two-to-one lead in German government-bond futures (its most active
contract) over Frankfurt's DTB, which opened only in 1990. LIFFE competes
with several other European exchanges, not always successfully: it lost the
market in ecu-bond futures to Paris's MATIF.
European exchanges armoured themselves for this battle in three ways.
The first was to fend off foreign competition with rules. In three years of
wrangling over the EC's investment-services directive, several member-
countries pushed for rules that would require securities to be traded only
on a recognized exchange. They also demanded rules for the disclosure of
trades and prices that would have hamstrung SEAQ's quote-driven trading
system. They were beaten off in the eventual compromise, partly because
governments realized they risked driving business outside the EC. But
residual attempts to stifle competition remain. Italy passed a law in 1991
requiring trades in Italian shares to be conducted through a firm based in
Italy. Under pressure from the European Commission, it may have to repeal
it.
6.1 New Ways for Old
The second response to competition has been frantic efforts by bourses
to modernize systems, improve services and cut costs. This has meant
investing in new trading systems, improving the way deals are settled, and
pressing governments to scrap stamp duties. It has also increasingly meant
trying to beat London at its own game, for instance by searching for ways
of matching London's prowess in block trading.
Paris, which galvanized itself in 1988, is a good example. Its bourse
is now open to outsiders. It has a computerized trading system based on
continuous auctions, and settlement of most of its deals is computerized.
Efforts to set up a block-trading mechanism continue, although slowly.
Meanwhile, MATIF, the French futures exchange, has become the continent's
biggest. It is especially proud of its ecu-bond contract, which should grow
in importance if and when monetary union looms.
Frankfurt, the continent's biggest stock-market, has moved more
ponderously, partly because Germany's federal system has kept regional
stock exchange in being, and left much of the regulation of its markets at
Land (state) level. Since January 1st 1993 all German exchanges (including
the DTB) have been grouped under a firm called Deutsche Borse AG, chaired
by Rolf Breuer, a member of Deutsche Bank’s board. But there is still some
way to go in centralizing German share-trading. German floor brokers
continue to resist the inroads made by the bank’s screen-based IBIS trading
system. A law to set up a federal securities regulator (and make insider-
dealing illegal) still lies becalmed in Bonn.
Other bourses are moving too. Milan is pushing forward with screen-
based trading and speeding up its settlement. Spain and Belgium are
reforming their stock-markets and launching new futures exchanges.
Amsterdam plans an especially determined attack on SEAQ. It is implementing
a McKinsey report that recommended a screen-based system for wholesale
deals, a special mechanism for big block trades and a bigger market-making
role for brokers.
Ironically, London now finds itself a laggard in some respects. Its
share settlement remains prehistoric; the computerized project to modernize
it has just been scrapped. The SEAQ trading system is falling apart; only
recently has the exchange, belatedly, approves plans draw up by Arthur
Andersen for a replacement, and there is plenty of skepticism in the City
about its ability to deliver. Yet the exchange’s claimed figures for its
share of trading in continental equities suggest that London is holding up
well against its competition.
Are these figures correct? Not necessarily: deals done through an agent
based in London often get counted as SEAQ business even when the
counterpart is based elsewhere and the order has been executed through a
continental bourse. In today’s electronic age, with many firms members of
most European exchanges, the true location of a deal can be impossible to
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