pin down. Continental bourses claim, anyway, to be winning back business
lost to London.
Financiers in London agree that the glory-days of SEAQ’s international
arm, when other European exchanges were moribund, are gone. Dealing in
London is now more often a complement to, rather than a substitute for,
dealing at home. Big blocks of stock may be bought or sold through London,
but broken apart or assembled through local bourses. Prices tend to be
derived from the domestic exchanges; it is notable that trading on SEAQ
drops when they are closed. Baron van Ittersum, chairman of the Amsterdam
exchange, calls this the “queen’s birthday effect”: trading in Dutch
equities in London slows to a trickle on Dutch public holidays.
Such competition-through-diversity has encourage European exchanges to
cut out the red tape that protected their members from outside competition,
to embrace electronics, and to adapt themselves to the wishes of investors
and issuers. Yet the diversity may also have had a cost in lower liquidity.
Investors, especially from outside Europe, are deterred if liquidity
remains divided among different exchanges. Companies suffer too: they
grumble about the costs of listing on several different markets.
So the third response of Europe’s bourses to their battle has been pan-
European co-operative ventures that could anticipate a bigger European
market. There are more wishful words here than deeds. Work on two joint EC
projects to pool market information, Pipe and Euroquote, was abandoned,
thanks mainly to hostility from Frankfurt and London. Eurolist, under which
a company meeting the listing requirements for one stock exchange will be
entitled to a listing on all, is going forward–but this is hardly a single
market. As Paris’s Mr Theodore puts it, "there is a compelling business
case for the big European exchanges building the European-regulated market
of to-morrow" Sir Andrew Hugh-Smith, chairman of the London exchange has
also long advocated one European market for professional investors
One reason little has been done is that bourses have been coping with
so many reforms at home. Many wanted to push these through before thinking
about Europe. But there is also atavistic nationalism. London, for example,
is unwilling to give up the leading role it has acquired in cross-border
trading between institutions; and other exchanges are unwilling to accept
that it keeps it. Mr. Theodore says there is no future for the European
bourses if they are forced to row in a boat with one helmsman. Amsterdam's
Baron van Ittersum also emphasises that a joint European market must not be
one under London's control.
Hence the latest, lesser notion gripping Europe's exchanges: bilateral
or multilateral links. The futures exchanges have shown the way. Last year
four smaller exchanges led by Amsterdam's EOE and OM, an options exchange
based in Sweden and London, joined together in a federation called FEX In
January of this year the continent's two biggest exchanges, MATIF and the
DTB, announced a link-up that was clearly aimed at toppling London's LIFFE
from its dominant position Gerard Pfauwadel, MATIF's chairman, trumpets the
deal as a precedent for other European exchanges. Mr Breuer, the Deutsche
Borse's chairman, reckons that a network of European exchanges is the way
forward, though he concedes that London will not warm to the idea. The
bourses of France and Germany can be expected to follow the MATIF/DTB lead.
It remains unclear how such link-ups will work, however. The notion is
that members of one exchange should be able to trade products listed on
another. So a Frenchman wanting to buy German government-bond futures could
do so through a dealer on MATIF, even though the contract is actually
traded in Frankfurt. That is easy to arrange via screen-based trading: all
that are needed are local terminals. But linking an electronic market such
as the DTB to a floorbased market with open-outcry trading such as MATIF is
harder Nor have any exchanges thought through an efficient way of pooling
their settlement systems
In any case, linkages and networks will do nothing to reduce the
plethora of European exchanges, or to build a single market for the main
European blue-chip stocks. For that a bigger joint effort is needed It
would not mean the death of national exchanges, for there will always be
business for individual investors, and in securities issued locally Mr
Breuer observes that ultimately all business is local. Small investors will
no doubt go on worrying about currency
risk unless and until monetary union happens. Yet large wholesale
investors are already used to hedging against it. For them, investment in
big European blue-chip securities would be much simpler on a single
wholesale European market, probably subject to a single regulator
More to the point, if investors and issuers want such a market, it will
emerge—whether today's exchanges provide it or not. What, after all, is an
exchange? It is no more than a system to bring together as many buyers and
sellers as possible, preferably under an agreed set of rules. That used to
mean a physically supervised trading floor. But computers have made it
possible to replicate the features of a physical exchange electronically.
And they make the dissemination of prices and the job of applying rules to
a market easier.
Most users of exchanges do not know or care which exchange they are
using: they deal through brokers or dealers. Their concern is to deal with
a reputable firm such as S. G. Warburg, Gold-man Sachs or Deutsche Bank,
not a reputable exchange. Since big firms are now members of most
exchanges, they can choose where to trade and where to resort to off-
exchange deals—which is why there is so much dispute over market shares
within Europe This fluidity creates much scope for new rivals to undercut
established stock exchanges.
6.2 Europe, Meet Electronics
Consider the experience of the New York Stock Exchange, which has
remained stalwartly loyal to its trading floor. It has been losing business
steadily for two decades, even in its own listed stocks. The winners have
included NASDAQ and cheaper regional exchanges. New York's trading has also
migrated to electronic trading systems, such as Jeffries & Co's Posit,
Reuters's Instinct and Wunsch (a computer grandly renamed the Arizona Stock
Exchange).
Something similar may happen in Europe. OM, the Swedish options
exchange, has an electronic trading system it calls Click. It recently
renamed itself the London Securities and Derivatives Exchange. Its chief
executive, Lynton Jones, dreams of offering clients side-by-side on a
screen a choice of cash products, options and futures, some of them
customised to suit particular clients The Chicago futures exchanges,
worried like all established exchanges about losing market share, have
recently launched "flex" contracts that combine the virtues of homogeneous
exchange-traded products with tailor-made over-the-counter ones.
American electronic trading systems are trying to break into European
markets with similarly imaginative products Instinet and Posit are already
active, though they have had limited success so far. NASDAQ has an
international arm in Europe. And there are homegrown systems, too.
Tradepoint, a new electronic order-driver trading system for British
equities, is about to open in London. Even bond-dealers could play a part.
Their trade association, ISMA, is recognized British exchange for trading
in Eurobonds; it has a computerized reporting system known as TRAX; most of
its members use the international clearing-houses Euroclear and Cedel for
trade settlement. It would not be hard for ISMA to widen its scope to
include equities or futures and options. The association has recently
announced a link with the Amsterdam Stock Exchange.
Electronics poses a threat to established exchanges that they will
never meet by trying to go it alone. A single European securities market
(or derivatives market) need not look like an established stock exchange at
all. It could be a network of the diverse trading and settlement systems
that already exists, with the necessary computer terminals scattered across
the EC. It will need to be regulated at the European level to provide
uniform reporting; an audit trail to allow deals to be retraced from seller
to buyer; and a way of making sure that investors can reach the market
makers offering the best prices. Existing national regulators would prefer
to do all this through co-operation; but some financiers already talk of
need for a European SEC. An analogy is European civil aviation’s reluctant
inching towards a European system of air-traffic control.
Once a Europe-wide market with agreed regulation is in place,
competition will window out the winners and losers among the member-
bourses, on the basis of services and cost, or of the rival charms of the
immediacy and size of quote-driven trading set against the keener prices of
order-driven trading. Not a cosy prospect; but if the EC’s existing
exchanges do not submit to such a European framework, other artists will
step in to deny them the adventure.
7. NEW ISSUES
Up to now, we have talked about the function of securities markets as
trading markets, where one investor who wants to move out of a particular
investment can easily sell to another investor who wishes to buy. We have
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