Commentary: The Battle For Europe's Blue Chips

A new giant walks the earth. Or so it seemed when the London Stock Exchange and the Frankfurt's Deutsche Borse announced in April that they planned to merge. Brokerage firms swiftly concluded that the Anglo-German combo would dominate European stock trading--and no other exchange stood a chance.

Well, today the giant is looking hobbled. Evidence is rapidly accumulating that the merger may not happen--and if it does, it may be a lot less formidable than anyone imagined. Either way, dominance of European stock trading may still be up for grabs. The advantage may even go to a brand-new venture: On July 10, the SWX Swiss Exchange and Tradepoint Financial Networks PLC, an alternative London-based electronic exchange, said they will join forces to create the first Europe-wide system, called Virt-X, to trade blue-chip stocks.

POTSHOTS. The way things are going with the LSE-Borse marriage, Virt-X may have a real chance. Although the Deutsche Borse board has approved the merger, securities firms in both countries have been taking potshots at the deal. London brokers are worried about the City losing ground to Frankfurt and about the costs of adopting German technology. Analysts think that if LSE members voted today, they might well torpedo the deal. The LSE is scrambling to win members over for an expected vote in September, but many remain skeptical.

Such problems are making Virt-X look attractive to the big banks that dominate institutional broking. For years, they have lobbied for a low-cost, Europewide trading system suited to the evolution of Europe's financial markets. Equities trading is growing at over 20% a year, and cross-border dealing is increasing even faster as European investors diversify out of domestic stocks. Traders worry that Europe's balkanized market system will act as a brake on such growth and might eventually break down entirely.

Virt-X is being launched with the blessings and support of eight major banks, including Merrill Lynch, Morgan Stanley Dean Witter, Credit Suisse First Boston, and UBS Warburg. They belong to the Tradepoint Consortium, a group that refinanced the money-losing exchange last year. Even Deutsche Bank, the most powerful backer of the Deutsche Borse, is a member.

Banks initially viewed Tradepoint, which hitherto has specialized in British stocks, as a stick to beat the big exchanges with to make them more efficient. But, with the LSE-Borse deal on the ropes, some bankers think Tradepoint has more potential and might be a better system. They like Tradepoint's lack of competing constituencies, bureaucracy, and political baggage that paralyze other European exchanges. The banks, of course, can make Tradepoint a success by pumping trades through the new system. Indeed, since Tradepoint began offering continental blue chips on July 10, volume has quadrupled, to about $240 million per day.

Tradepoint has other trump cards. It has a regulatory green light not only to trade stocks across Europe but to hook up traders in the U.S. to its system. It offers a single regulator, London's Financial Services Authority, and a single clearing system, which could slash high trading costs. "Tradepoint has answered all the questions," says Richard Balarkas, head of electronic trading at Credit Suisse First Boston in London.

The Swiss Exchange, which will take a 38% stake in Tradepoint, adds heft to Virt-X, which will kick off in early 2001. The Swiss Exchange brings a respected trading system, EBS, and about $2 billion in average daily trading volume in Swiss blue chips.

Tradepoint supporters believe that Virt-X could emerge as the place of choice to trade Europe's biggest stocks, such as Vodafone AirTouch PLC and Deutsche Telekom. The traditional exchanges, they think, may wind up being mainly used as vehicles for trading smaller, local stocks. "We traded stocks in eight different countries through Tradepoint yesterday," says Alan Hodson, head of European equities at UBS Warburg, Europe's leading stock trading firm. "You can't do that through any other exchange." The message couldn't be much clearer: The architects of the LSE-Borse deal had better listen up.

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