This Beachhead Isn't Much To Land On

In Easdaq, Nasdaq would get a feeble European partner

For a time last year, almost every week brought reports that Nasdaq was courting one European bourse or another. As the world's top high-tech market, Nasdaq should have had its pick of partners--the London Stock Exchange, the Deutsche Borse, Euronext. Yet no merger or other tie-up was consummated. Then, at the end of January, reports popped up in Europe that Nasdaq was taking a major stake in Easdaq, a tiny Brussels stock market with a heap of problems, as its European beachhead.

Neither Nasdaq, Easdaq, nor Easdaq's largest shareholder, U.S.-based Knight Trading Group, would comment on the stories, though Nasdaq Chairman Frank Zarb said recently that Nasdaq was "not only talking to one exchange."

If finalized, such a deal would be a godsend for the five-year-old Easdaq, which never lived up to its promise as a Continentwide high-tech exchange. Bested by France's Nouveau Marche, Germany's Neuer Markt, and other high-tech markets affiliated with national bourses, it was always a backwater. It lists only 65 stocks, most of them from small countries such as Austria and Belgium. Recently, several high-profile listings, including British software pioneer Autonomy Corp. and Belgian Internet-security leader Ubizen, decamped for the London Stock Exchange and Euronext, respectively. "We preferred to go home," says Simon Fletcher, Autonomy's director of investor relations.

For Nasdaq, which already has a tiny (less than 1%) stake in Easdaq, a deal raises a host of questions. True, an Easdaq link would give it a toehold in Europe--a key part of its strategy to build a global chain of high-tech markets. That vision reflects the inevitable consolidation of bourses in a world of instant, electronic trading, Nasdaq officials say. Yet Nasdaq's choice of such a feeble partner--and Easdaq's own history--underscore how difficult it is to transcend national borders. "It's a little bizarre, a sign of weakness," says an official at another European exchange.

But others note the move would bypass the endless politics blocking transnational linkups. "Sometimes, you do the step that's doable even if it's not a giant step for mankind," says Angela Knight, chief executive of Britain's Association of Private Client Investment Managers and Stockbrokers. Easdaq could become "very powerful," she adds, as a place where investors have "one-stop access" to European and U.S. capital markets.

The two exchanges already share some traits. Like Nasdaq, Easdaq has a market-maker structure: Investors put in orders to designated dealers, who quote prices and make their money from the spread between buy and sell prices. A small number of Nasdaq stocks already trade on Easdaq, although they are not listed there.

Still, Nasdaq will have a very difficult task ahead if it wants to build a Europewide exchange from an Easdaq base. Although institutional investors complain that it's absurd and expensive for the Continent to support 20-odd stock markets, most companies find they have a larger pool of investors in their own backyards than in a supposedly Europewide market. "If you are in London or Frankfurt, you can be in the local index, which the funds track," explains Brian Skiba, senior global technology analyst at Lehman Brothers Inc. In contrast, he remarks, "nobody has to own an Easdaq stock." France's Nouveau Marche lists three times as many companies as Easdaq, and Germany's Neuer Markt about five times more.

WHAT'S THAT SMELL? Plus, there's the lingering odor from the fraud allegations surrounding the Belgian speech-recognition company Lernout & Hauspie, once Easdaq's prize listing. Although Easdaq adopted an independent market-surveillance operation, European disclosure rules are far less stringent than those in the U.S. It was U.S. regulators who uncovered the alleged Lernout & Hauspie fraud.

The Nasdaq investment could have an immediate payoff if companies now considering moving from Easdaq to other exchanges are willing to hold off. But even with a rich American backer, Easdaq's revival will be a tough assignment.

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