The notion of institutionalized sharing is nothing new. Cubans do it. The National Football League does it. Some say chimpanzees do it. Sharing pools of equity investment capital, however, has always been a trickier proposition. Traditional markets have been exclusive clubs (some might say prisons) with jealously guarded boundaries. The system worked if those boundaries were secure. However, the globalization of product and financial markets, fueled by technology and the internet in particular, has put today’s stock exchanges under siege.
A new information-age system of markets is needed to meet global capital formation requirements. John Wall, president of Nasdaq-Amex International, thinks he knows how to create it, and that is why the word ‘sharing’ regularly finds its way into his description of Nasdaq’s business philosophy.
‘Traditional exchanges build barriers so that the only way to trade a stock is within that market,’ says Wall, responsible for strategic development and international marketing. ‘We think sharing is better.’ He points to Nasdaq’s offer to include alternative trading systems or electronic communications networks (ECNs) into its trading network as evidence for that cooperative philosophy. ‘We felt if ECNs could sometimes come in with a superior way of doing business, then they should be part of the market,’ says Wall.
That viewpoint is reflected in Wall’s approach to globalization. He is willing to risk trading smaller pieces for a bigger, better pie. He figures it is time other exchanges did the same. Were they of like mind, it would be handy for Nasdaq because it is betting that its inclusive model can be expanded on a global scale. Its objective is to link capital pools into an electronic constellation of markets. In fact, while regulatory issues remain, Nasdaq has already begun the foundations of those linkages.
Sister markets
The recent unveiling of Nasdaq-Europe and Nasdaq-Japan sent tremors through each region’s financial communities. Modeled after Nasdaq USA, both new stock exchanges promise a low cost, internet-accessible securities market seamlessly linked across time zones with each other and Nasdaq USA. The basic advantage for issuers, says Wall, is increased liquidity and a broader shareholder base leading to less volatility.
As on US Nasdaq, listing requirements for the new markets will be based on transparency rather than performance. Unlike Nasdaq US however, both Nasdaq-Europe and its Japanese counterpart will use a hybrid market model combining a central limit order book with the ability for marketmakers to internalize orders. Nasdaq is developing an order display ‘window’ that aggregates pre-trade data on the interests of both ECNs and marketmakers. ‘Nasdaq’s success has been to attract risk capital through marketmakers,’ states Wall. ‘That is vital for young markets directing themselves toward entrepreneurial businesses.’
To lure other exchanges into a confluence of interconnected trading entities, Wall is ready to give up half and sometimes all of a trade depending on where the best price is found. Nasdaq has talked with European markets, but for now the competition doesn’t seem keen to share shares.
Until that changes, Wall is confident he can leverage Nasdaq’s brand name (which has been heavily marketed in Europe) to stock his exchange with high-tech European IPOs coming down the pipe as well as blue chips already trading on Nasdaq USA. ‘It takes critical mass from a business standpoint to make it work,’ states Wall. ‘We do have that critical mass.’
There is, in fact, already a fair bit of ‘critical mass’ in Europe. However, sparking a chain reaction has been difficult. Nasdaq’s major competition includes Frankfurt’s Neuer Markt, Belgium-based Easdaq and the Euro.NM network. Easdaq has struggled, but is refinancing itself with help from US-based online brokerage E*Trade. Things have been brighter at the Neuer Markt which witnessed over 140 IPOs in 1999; and at Euro.NM where 300 companies have come to market in the last three years.
Still, political barriers have generally hampered financial unions across Europe. For example, the LSE’s planned pan-European platform with other major European exchanges has seen painfully slow progress. The news of Nasdaq-Europe’s advent came as a blow to the LSE which had days earlier launched a new index called techMark designed to attract high growth stocks.
‘[Nasdaq is] pushing against an open door,’ says Paul Kleiser, fund manager of Scottish Equitable’s technology fund. ‘There is a lot of opportunity in Europe. Some of the existing markets for technology start-ups have had difficult launches and remain illiquid. But Nasdaq has a proven track record of supporting start-ups.’
Nasdaq strides into the European battle with a further advantage. The cost and complexity of securities settlement has long hampered cross-border investment. By March, however, a planned link between US and UK clearance systems should make it up to 80 percent cheaper for UK investors to trade Nasdaq-listed stocks.
All Nasdaq, all the time
While Nasdaq deals with a panoply of European exchanges, it must apply a different strategy in Japan. When it first unveiled its plans last June, Japanese competition looked dim. ‘There was no venture market for high-techs,’ says Wall. ‘There was a tremendous void.’ Discussions with the Tokyo Stock Exchange were fruitless and Nasdaq turned to the Osaka Stock Exchange to operate Nasdaq-Japan. However, the TSE has since responded with a venture market which was gearing up to start trading in December 1999.
Nasdaq-Japan’s mechanism and mandate are similar to Nasdaq-Europe. Besides letting Japanese growth companies raise capital and trade in all three markets, it will also give Japanese investors access to US stocks. Of course, for now, a Japanese company listing on Nasdaq Japan (or a European on Nasdaq-Europe) does not get instant access to the other two capital pools. Such a stock must still be registered with local authorities. However, Wall envisions global companies, such as Kirin or Microsoft, meeting international requirements and trading on both entities. Meanwhile, smaller Japanese companies could still get Japanese distribution through Nasdaq-Japan while also having access to US qualified institutional buyers via rule 144a provisions.
While the US Nasdaq is open, Japanese investors can trade in all Nasdaq stocks on Nasdaq-Japan. After the US market closes, Nasdaq-Japan will trade in the top 100 Nasdaq companies in Japan. With some Japanese stocks listing with US Nasdaq, allowing American investors to trade them, Nasdaq’s top stocks will, in effect, be trading around the clock.
Nasdaq’s US parent, the National Association of Securities Dealers, or NASD, is partnering with investment company Softbank Corp of Japan for the Japanese venture. News Corporation’s venture capital fund, epartners, and France’s Vivendi are joining Softbank to finance the European operation.
Nasdaq is also coaxing other Asia-Pacific regions into its web of international alliances. It plans a Shanghai office and is developing exchange programs to dual list and trade securities in Hong Kong and Australia. Elsewhere, Nasdaq is even pondering a ‘Nasdaq-Israel’.
Ultimately, Nasdaq’s goal is to become a profit-making public company that ships liquidity around the world. A public listing would help finance the technological infrastructure still to come, but it would require separating Nasdaq’s regulatory function.
In the end, globalization is not a law of nature and a single trading platform has many hurdles. Still, Wall is convinced it is inevitable and, like many of his listed clients, he is eager to grasp and shape the global electronic network. Whether Nasdaq’s particular vision is destined to prevail is unknown. Regardless, the brash American market is catalyzing change, and the vision of a truly global stock market may be a reality sooner than we expect.
