Unless you were castaway on a desert island, it would have been difficult not to notice the massive shake-up that has struck the world financial markets. Mergers, link-ups and agreements between bourses have been announced to the world on an almost daily basis of late. Even in the whirlwind atmosphere of today’s financial markets, the speed at which centuries-old exchanges have disappeared left many surprised.
The scene was set in March with the Paris, Amsterdam and Brussels bourses merging to create Euronext, a pan-European stock market to rival the larger Frankfurt and London exchanges. This stung other markets into action, and venerable financial institutions from Europe, North America, Asia and even Latin America were soon clamoring to surrender their independence as an elaborate game of capital market courtship got underway. Maybe you can blame the spring weather, with relationships between exchanges blossoming in the first week of May as they matched up or merged at an unprecedented rate.
First came the marriage of the London Stock Exchange and Germany’s Deutsche Borse, creating International Exchanges, or iX. This was one relationship that might never have happened. Soon after sealing its Euronext merger, the Paris Bourse went searching for new partners. Though the financial press highlighted Madrid and Milan as more likely candidates, it was the London exchange that became the subject of Euronext’s affections. But the LSE was unimpressed, and Paris’ proposal was spurned.
Within days, attention had switched to North America, following rumors of a trans-Atlantic alliance between the newly-formed iX and the Nasdaq Stock Market. It became clear that Nasdaq was also present at the wedding of London and Frankfurt because it soon announced a link-up for ‘new economy’ stocks listed in London, Frankfurt and New York to be cross traded. It’s the first step towards a 24-hour global trading platform, encompassing the key time zones of Europe, the US and – through newly-launched Nasdaq Japan – Asia. Frank Zarb, chairman and CEO of the NASD, could hardly contain his glee: ‘I’m delighted. Today’s announcement represents one further step in realizing our global vision,’ he said.
Speculation soon began to mount over which exchanges would be next to announce an alliance. A Financial Times editorial claimed that the next logical step would be for Euronext to join iX, creating a single European capital market, boosting liquidity, improving transparency and lowering the cost of capital. But such rumors were scotched (at least in the short term) a few days later, when news broke that the NYSE had also been hit by an urge to merge and was in talks with an eye-popping number of exchanges – Euronext, the Toronto Stock Exchange as well as markets in Mexico City, Santiago, Buenos Aires, Sao Paulo, Hong Kong and Tokyo – to establish a global network of stock markets.
According to ‘people familiar with the talks’, Euronext had been seeking partners outside of Europe. News that iX had signed a deal with the Madrid and Milan exchanges served to further isolate Euronext in its own backyard.
Joining Euronext in talks with the NYSE were several Latin American markets, suffering from a wave of lost listings to the NYSE or Nasdaq. Discussions between the Tokyo Stock Exchange and the NYSE on common listing standards are said to be at an early stage as the Japanese market faces up to a challenge from Nasdaq Japan, which will launch later this month.
So what’s prompted leading stock markets to seek partners with almost unseemly haste? Competition between markets has intensified in recent years and companies can now list on numerous exchanges, with technology markets such as Nasdaq enjoying particular success.
NYSE chairman Dick Grasso resumed his rallying cry of globalization: ‘A core 1,000 global companies will trade in multiple arenas,’ he said in an interview. ‘Is it not better to make the pie larger and thus everyone benefit?’ The NYSE has previously avoided making pacts with overseas markets – unlike Nasdaq which has been busy forging alliances and launching new markets. But the birth of iX, coupled with its link-up with Nasdaq, presents the NYSE with some serious competition and no-one wants to be left behind in the race for an expanding pool of global capital. Even the world’s largest stock market, the NYSE, feels the need to gather partners in order to secure its long-term future.
For many, the most likely partner for the NYSE is the Toronto Stock Exchange (TSE), which has held talks with both Nasdaq and the NYSE over recent weeks. The barriers to a New York-Toronto merger are low, as they share similar regulatory regimes. And clearly the TSE is seeking to establish a defense against soon-to-be-launched Nasdaq Canada, which was announced at the end of April.
Back in Europe, where the fragmented market has cost institutions and investors billions, one of the primary motives has been to reduce trading costs and boost market efficiency. But investors and traders have for years complained about the inefficiencies of Europe’s markets, without ever achieving much change.
Demutualization at at the London Stock Exchange and Deutsche Borse has also spurred European exchange bosses into action. Shareholders in the LSE or Deutsche Borse (which is renaming itself Euroboard) will demand increased performance and returns.
But this is not the first time that Frankfurt and London have sought to strengthen ties. Two years ago the markets agreed to improve cooperation in a number of areas. But the alliance spluttered to a halt early on, dogged by disagreements. The creation of Euronext clearly dragged London and Frankfurt out of their squabbling and brought them around the negotiating table.
Several regulatory wrangles still have to be ironed out before the plans for alliances that have already been limned can come to fruition. Differing regulatory and tax regimes need to converge. And that includes currency. As order books can only quote stocks in one currency, problems may hit investors who will still need quotes in their home currency.
Many other obstacles remain, not least skepticism on behalf of investors and institutions over the set-up costs and logistical problems that an exchange which straddles international boundaries may encounter. Already leading investment banks have met exchange officials to voice their concern over the proposed shareholder structure for iX.
Little attention has been paid to the casualties of the exchange mergers, with much blood likely to be spilled in Europe. In light of its agreement for a link-up with iX, Nasdaq has shelved plans for Nasdaq Europe. The iX-Nasdaq link also spells the end for Neuer Markt and techMARK, for they are to be succeeded by the new iX-Nasdaq high-growth market. Then there’s Easdaq, the electronic Europe-wide technology platform, which is likely to be looking over its shoulder at iX and Nasdaq’s plans. There are also the smaller exchanges that have so far been left out in the cold. Amid the cacophony of announcements and releases from the major markets, few would have noticed the news that the Baltic markets in Lithuania, Latvia and Estonia are to join Norex, the proposed Nordic stock exchange alliance. And the succession of alliances may not be over yet. Deutsche BÅ¡rse chief Werner Seifert has expressed his desire for a full merger between iX and Nasdaq, and he’s also keen to see consolidation in Europe’s main settlement systems.
So can we expect to see integrated trans-national trading platforms dominate equity markets in the near future? It seems likely. The drive for efficiency makes the creation of a single global trading platform a logical step. As recent events have proved, the landscape of global equities markets can change very fast. But with lower costs and increased liquidity promised for investors, the prospect of round-the-clock trading cannot be too far away. Global markets and 24-hour trading will boost liquidity, transparency and iron out the discrepancies in international market regulation. The international investor should become an increasingly common phenomenon as shareholders in different countries will be able to access to foreign stocks. The challenge for IR is to keep pace with this rapid change. Already-harassed IROs can’t be expected to keep watch on their stocks 24 hours-a-day. Increasingly, companies will establish IR programs and offices in different continents to keep up with their expanding investor base. But don’t make any plans yet; given the current pace of change, by the time you read this, the landscape of the world’s equity markets could have changed dramatically. Again.
