Bigger, Faster, Cheaper: Revolution In The Bourses

Europe's scattered exchanges gird for a titanic struggle

A storm is sweeping across Europe's financial exchanges. The London Stock Exchange has been crowing about switching to an automated trading system by Oct. 20. But on Sept. 17, the Frankfurt, Paris, and Zurich exchanges stole some of the LSE's thunder by announcing a broad linkup in derivatives trading. What's more, the three bourses plan to merge all their markets, including stock, fixed income, and derivatives trading and clearing, by 2001.

Europe's bourses will never be the same. The battle of the exchanges is forcing them to consolidate and pushing brokers to cut commissions, which have long been higher than those in the U.S. As European investors pour more money into equities, they will find bourses with more transparent pricing and greater liquidity than ever before. And with more capital flowing in, companies will find it easier and cheaper to raise money, too.

With the expected advent of the single European currency in 1999, Europe's markets ultimately may coalesce into three or four electronically linked financial zones. One might encompass Germany, France, Switzerland, and the Benelux countries. London could be another, and the Scandinavian countries yet a third. Indeed, the Stockholm and Copenhagen exchanges already have announced their intention to merge (table).

Exchange officials also worry that technology may make bourses obsolete. They must keep modernizing, cutting costs, and providing the services their customers want, or find themselves eclipsed by the explosion of the Internet and other new electronic systems. "The concern of all the European exchanges is surviving against" newer systems, says Martin Wheatley, head of development at the LSE. "Exchanges with physical walls are under some threat."

Not too long ago, it appeared that London might wipe out its European competitors. Even now, its domestic market capitalization of $1.7 billion is more than double that of Frankfurt, Europe's No.2 bourse. London got a headstart from its 1986 "Big Bang," in which it abolished minimum commissions, eliminated the trading floor, and let foreign companies own member firms. But the LSE still was dominated by a club of market makers in stocks, while rival bourses in Frankfurt, Paris, Milan, and Stockholm were investing in technology.

London is feeling pressure to catch up. Although the LSE has eliminated its expensive trading floor, more progress could be made. Its old-fashioned quote system, in which bid and offer prices are posted electronically but actual trades are made through market makers, annoys some customers because it produces wider spreads than Continental bourses.

The LSE thinks its new system will cure many of these ills. Limited initially to the biggest 100 stocks, the system will offer an electronic "order book" that will more efficiently match buyers and sellers. Member firms will be able to execute orders at a given price by pushing a button. Actual prices, rather than bids and offers, will be posted in the order book, making trading fairer.

A BIG PAYOFF. Some members grouse about the cost of revamping their trading platforms for the new system. But the LSE, which is investing $130 million itself, thinks doing so will pay off. In the first year alone, the LSE--based on other exchanges' experiences--expects to double the number of trades.

But that may not be enough in a financial world in which changes are accelerating. Even cautious Frankfurt is cutting its fees to match London's. An electronic system to be unveiled in November eventually may force the closure of Germany's eight stock-trading floors--the last of their kind in Europe. In a few more years, there may be only "one big European market," says Steven Kendall, director of European equities trading at NatWest Securities. Across Europe, the winds of change are only just beginning to howl.

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