Global Bourses? Hold Your Horses
One world, one equities market. Global exchanges where trading never stops. Stock market futurists insist that, on a wired planet, the world's 100-plus bourses must converge into a few networks of world scope. And stock exchange presidents in at least a dozen countries are struggling to turn that vision into reality. The need for unified trading systems--at least for the 2,000 or so companies of global interest--seems obvious to them. The potential savings on technology and order processing could be prodigious.
"Markets are consolidating across borders," says Frank Zarb, chairman of the Nasdaq, the U.S. high-tech market, which is aggressively trying to expand its reach abroad. "We would like to have investors invest and companies get capital in markets other than their own."
NEW TALKS. Clearly, the momentum behind market tie-ups is strong. Frankfurt's Deutsche Borse plans to go public this year to give itself "acquisition currency," says Chairman Rolf-E. Breuer. The Borse is also said to be talking again with the London Stock Exchange, despite the blowup of its proposed merger with the LSE last year, and with Stockholm exchange operator OM Gruppen, whose unsuccessful bid for the LSE broke up the Germans' deal. Nasdaq says it's probing links with its European counterparts and hopes to cut a deal "over the next several weeks to months," according to James Weber, Nasdaq's London-based senior vice-president for international development.
That timetable sounds awfully optimistic. In fact, courtships among markets around the world have resulted in few weddings, generating some skepticism about the entire enterprise. "The process of getting from here to there is slow, and it has its detractors," admits Zarb. The London-Frankfurt merger was a case in point: It crashed last year on the shoals of national pride, separate regulatory systems, and incompatible market structures. In Asia, antiquated local regulations, together with the worldwide tech-stock rout, are strangling a joint venture between Nasdaq Japan and Softbank, which operates on the Osaka Securities Exchange. A pilot scheme for trading some Nasdaq stocks in Hong Kong now seems moribund.
In fact, cross-border linkups have proved so difficult that some observers wonder whether the effort to create global bourses makes any sense after all. Retail investors favor local stocks. Given the chance to buy foreign stocks on the Tokyo Stock Exchange, Japanese investors pass. European stock buyers also stick close to home. Only 15% of U.S. investors own foreign shares, despite a wide array of American depositary receipts, a Securities Industry Assn. study shows.
True, cross-border trading is more complicated and expensive than local dealing, but that doesn't hinder big financial institutions, which have foreign trading desks and multiple exchange memberships. Global trading volume is already enormous. Net foreign purchases of U.S. securities, for example, totaled $350 billion from January to September, 2000, up 34% from the same period of 1999, says Morgan Stanley Dean Witter. And euro-zone investors bought a net $250 billion of foreign stocks in the 12 months to September.
FIRM FEALTY. In fact, the big push for stock-exchange consolidation comes from the bourses themselves. The major exchanges fear that if they can't make global trading easier and cheaper, their biggest customers--companies, banks, brokers, and pension funds, which swear fealty to the cheapest, most liquid market--will join or create private electronic markets, leaving the exchanges with a largely retail business and listing responsibility. Competition from such markets, called electronic communications networks (ECNs), has forced changes, including lower trading costs, in the U.S. "If we wait, another structure will have emerged and will fill the function of a stock exchange: making an orderly market," says Georges Ugeux, a Belgian banker with training in law and economics who's the New York Stock Exchange's executive vice-president in charge of global strategy.
The wolf is already at the door. The seven-week-old Jiway, owned by OM Gruppen and Morgan Stanley Dean Witter, offers electronic trading in 400 British, French, Swedish, and U.S. stocks to retail investors--although volume is low. A bigger threat is virt-x. Formed by the merger of the Swiss Stock Exchange and the electronic exchange Tradepoint, whose shareholders include top financial-services groups, it is slated to start trading European blue chips in early 2001. In October, Merrill Lynch & Co. launched MLX MarketEdge, a cross-border network for European retail brokerages and banks.
The traditional exchanges are trying to respond. The one merger that went through last year puts Paris and the much-smaller Amsterdam and Brussels markets under one umbrella, called Euronext. But Euronext isn't truly unified, since the lack of a common European regulator means that all three local exchanges will continue to operate until French, Dutch, and Belgian securities officials harmonize their rules (box, page 52).
The fact is that most of the world's major bourses still have strong national identities and carry considerable historic baggage. They're under local laws, run by people with national interests, and generally dominated by investors from their home countries. That makes them tough merger candidates. Even less-formal linkups pose immense logistical, technical, and political problems.
ONWARD AND UPWARD. Still, the world's largest stock markets are forging ahead. "Sometimes when I wake up, I think I'm crazy," admits the NYSE's Ugeux. His mission: to create a 10-bourse electronic network for 24-hour blue-chip trading dubbed the Global Equity Market (GEM), with the NYSE at its hub.
After several years of planning, Uguex hopes to get a pilot project linking the Big Board and the Toronto Stock Exchange under way by the end of 2001. The Nasdaq meanwhile continues its strategy of teaming up with foreign exchanges to create new tech-oriented markets that it will eventually link to its base. The Nasdaq's 39% fall in 2000 won't stop the process, insists Chairman Zarb: "When things slow up is often a good chance to build things."
In theory, a 24-hour global bourse makes economic sense. Investment banks and brokers would save on multiple exchange memberships, companies on multiple listings and compliance costs, and investors on duplicate fees to local and foreign brokers. Merging the clearing houses could produce big savings, especially in Europe, where there are more than 30 clearing, settling, and depositary companies.
But the obstacles are daunting. If the modest Euronext project must live with three national regulators, imagine what it will take to push through GEM, which will link the NYSE with Euronext and exchanges in Hong Kong, Mexico City, Tokyo, Toronto, Sao Paulo, and Sydney. The mechanism will be an electronic trading network with branches in each country. One day, "the Mexican investor will be able to buy Japanese blue chips in pesos on the Bolsa de Mexico," says Ugeux.
Getting such ventures past the U.S. Securities & Exchange Commission, which has the world's toughest standards, will, however, be a high hurdle. For foreign exchanges to offer shares to U.S. investors via a link with the Nasdaq or NYSE, the companies involved must meet U.S. accounting standards. Expect no waivers. "Once you open our markets to that, you have an erosion of the requirements," says Annette L. Nazareth, the SEC's director of market regulation. That's why the GEM project will start with a group of foreign companies that are already registered in the U.S., says Ugeux.
"UNIFORM SETTLEMENT." Some institutional investors say the global consolidation projects are just a sideshow. They're impatient instead for regional mergers, especially in Europe, where the existence of some 20 stock markets undermines the benefits of a common currency. "We will see a truly pan-European exchange in the next year or two," says Michael C. Schoeck, the head of non-U.S. equities at State Street Global Advisors in Boston. "I would be surprised if there's a U.S. angle. We want uniform settlement. We want to see uniform taxes and a uniform takeover code."
The same problems crop up across the globe--no matter how compatible the partners seem. The Australian Stock Exchange and its much smaller New Zealand counterpart have merger plans in the works, but the process has slowed because there has been little progress in the two countries' efforts to harmonize their corporate and securities laws.
Elsewhere, the politics of streamlining cross-border trading is starting to exasperate financial institutions. "There has been a lot of discussion, some aborted moves--and not much action," says Paul Roy, the global head of equities at Merrill Lynch in London. "It seems that sorting this out is going to take a lot longer than anybody thought." And he was referring to a pan-European exchange. Global stock exchanges? Don't hold your breath.