Commentary: Europe's One Stop Bourse? Don't Hold Your Breath

Is it a bold new vision for a Europewide stock market? Or just the beginning of a long spate of political jockeying among Europe's fractious and undersized stock exchanges?

The July 7 announcement of a strategic alliance between Deutsche Borse, which operates the Frankfurt exchange, and the London Stock Exchange could well turn out to be more of the latter than the former. The two stock exchanges plan to develop a system to trade the top 300 or so European stocks in market capitalization on a single screen by next January. The idea is to cut costs and maximize liquidity by providing a "one-stop" electronic trading system for shares of the biggest companies. The partners have invited more than a dozen other Continental exchanges to join, too. "In the best-case scenario--if all the other European exchanges join in--it will increase foreign investment in Europe and could cut transaction costs," says Phillip A. Wale, London-based head of global equity trading for Germany's Commerzbank.

EURO FACTOR. The question is when--and if--that scenario will ever play out. There's little doubt that European stock exchanges have to consolidate as the arrival of the single currency next year forces a profound restructuring of European financial markets. Fund managers are already starting to treat major stocks on a Continentwide, rather than national, basis, potentially making Europe's patchwork system of national bourses obsolete.

Major brokerage houses, tired of the turf wars between London, Frankfurt, and other financial centers, are pressuring the exchanges to simplify and cut costs. The London-Frankfurt alliance, says Werner G. Seifert, Deutsche Borse's chief executive, is "the logical answer to the marginalization of national and local financial centers." Big brokers and the Bank of England nudged London toward an alliance, fearing the City could be in danger because Britain doesn't initially plan to join the European monetary union. London "ran the risk of being left on the shelf," says Paul D. Roy, head of European Equities at Merrill Lynch & Co.

It's far from clear, however, that the new alliance will succeed, let alone lead to a seamless European capital market. One reason for skepticism is that this isn't the first grand scheme Seifert has jumped into. Only a few weeks ago, news leaked out that he was in the process of negotiating an alliance with the U.S.'s NASDAQ. And last year, he announced a deal to link the derivative exchanges of Germany, France, and Switzerland.

At the time, Seifert said he hoped that alliance would eventually lead to the fusion of the three nations' stock exchanges, as well. But the deal with London "seems to be an admission by Deutsche Borse that its alliance with the Paris exchange isn't working," says Benn Steil, director of the International Economics Program at London's Royal Institute of International Affairs. Adds a spokeswoman for the Paris Bourse: "We were surprised not to be consulted."

MAJOR ISSUES. The miffed French admit that they could end up joining the London-Frankfurt alliance. But they note that there are major issues to be resolved first, including how trading revenues will be shared. Also, rather than adopt the expensive trading system the British and Germans have developed, the French and other Continental bourses argue that it might be better to electronically link existing exchanges in a loose confederation. Such linkups already exist between the Stockholm and Copenhagen exchanges and between exchanges in Belgium, Holland, and Luxembourg. That could lead to several regional Continental powerhouses, rather than the single pan-European exchange Seifert and his London counterpart, Gavin Casey, hope to foster.

Seifert and Casey play down Europe's internecine rivalries. But it's not clear that the hatchet is completely buried, even between their two exchanges. Deutsche Borse's derivatives subsidiary is still aggressively going after the London International Financial Futures Exchange's market. Ultimately the two partners may broaden their alliance to include derivatives, too. But there's likely to be a lot of infighting before Europe's bourses begin cooperating in earnest.

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