Around the world, stock markets have grown to many different shapes and sizes. In 1531 the first exchange was created in Antwerp; today there are more than 150 in all, from New York to New Zealand. Most countries have one of their own and some, like the US and Japan, have more than one. Stock exchanges have stood throughout history as symbols of national pride, though they are now opening their doors to the influences of globalization.
In our last two articles (December 2000, January 2001) we saw how traditional exchanges are evolving to meet the demands of the global marketplace and how alternative trading networks have snatched some of their business. All the world’s trading venues are becoming increasingly automated and increasingly linked across geographical borders. It is here we pick up the story and take a look at the future of equities trading.
Global auction market
The first word on this topic is Gem – or Global Equity Markets – which is a partnership established by the NYSE and nine major exchanges worldwide: Australia, Tokyo and Hong Kong in Asia-Pacific; Sao Paulo, Mexico and Toronto in the Americas; and Euronext, the combined Amsterdam, Brussels and Paris exchanges, in Europe. The plan is to form a single mechanism that would allow investors across the world to ‘follow the sun’ – a global pool of liquidity that facilitates price discovery and provides investors with better access to global stocks. The ten-member alliance boasts unmatched liquidity, with a sum market capitalization exceeding $20 tn – more than 60 percent of the world’s market cap. ‘Gem is at the end of its feasibility study – we think it’s feasible, now we are going to enter the development phase,’ explains Georges Ugeux, the NYSE’s international group executive VP. ‘We have spent the last six months or so in intensive consultation with all the partners and I think we are close to a concept that everybody buys.’ The proposed market would link all the exchanges’ trading systems to provide a global market structure based on the principles of transparency, self-regulation and agency-auction price discovery.
Michael Roche, the Australian Stock Exchange’s executive general manager of strategic planning, marketing and corporate relations, says this model maintains home market liquidity for listed companies. ‘The world stock exchange alliance believes stocks have their natural home. Let’s route orders to that place – because that’s where the investor is most likely to find best execution – rather than creating multiple pools of liquidity around the world and saying to investors, Now you go out and find the best price.’
Many observers consider a global exchange network inevitable. Still, obstacles remain. Clearing and settling costs continue to be the Achilles’ heal of cross-border trading, particularly in Europe. Although Gem has no immediate solution for these high costs, it aims to achieve efficient processing through the clearing and settlement agencies of each exchange. In other words, costs will be determined by regional agencies, though international competition may serve to drive them down.
Another challenge is the lack of regulatory standards. Currently the US SEC doesn’t recognize mutual self-regulation of foreign exchanges and this, Ugeux believes, is a necessary requirement for Gem’s success. ‘Thankfully the market capitalization of the non-US companies listed on the NYSE is already the second largest market in the world. We have 450 companies that have a market cap of $6 tn, and I think that’s a good starting point for a worldwide alliance.’
‘We believe that, at least for the time being, greater strides are being made towards global harmonization of securities regulation,’ Roche adds, emphasizing Gem’s willingness to observe each country’s regulatory sovereignty. ‘It is about investors coming to their local exchange and their orders being routed into a foreign market where they’ll be executed under all the regulatory conditions of that other market. The investor has to understand that.’
Global dealer market
Gem is not the only global equity market in the works. There’s also Nasdaq, the model established 30 years ago by the NASD to link securities dealers across the US and form a unified trading platform. Nasdaq’s success, especially with the technological advances of recent years, has shown the world that pooled liquidity does not depend on a single, unified trading floor. From this model it’s just a short leap to imagine a worldwide dealer market.
Nasdaq’s goal, according to John Hilley, chairman and CEO of Nasdaq International, is to build the world’s first global electronic trading and processing platform. The NASD has successfully launched Nasdaq Japan and Nasdaq Canada and is still working toward Nasdaq Europe. From there, it’s a question of linking them all to one another and possibly to other trading venues.
‘In a nutshell, we are a network exchange,’ Hilley explains. ‘Just as establishing that network across America has been very positive for companies in terms of liquidity and their exposure, for those that have the global reach, expanding the network to include more investors will add more liquidity and more price discovery.’
Traditionally, the NYSE, the world’s largest stock market, and Nasdaq, the second-largest, have argued about which trading model is the best, focusing on the difference between their auction and dealer markets respectively. With global trading platforms, however, the arguments take on a new character. Gem seeks to link existing auction markets while Nasdaq International hopes to create a linked network comprising newly-formed exchanges.
Both Nasdaq International and Gem have fundamental similarities. Each model is based on the premise that the whole network of markets is greater than the sum of its parts; both observe national regulations while advocating global standards; and both make international investments their priority.
Still, Hilley admits, global trading is not for all. ‘Many companies are basically local or regional – not well-known enough to be of interest to investors in other parts of the world. But there are probably a couple hundred companies even today that are deployed globally in their own businesses, that are known globally, that are branded globally, and that have sufficient investor interest.’ Hilley says the global exchange will benefit these companies initially, but will also help smaller companies grow beyond their regions.
Where to list?
With all of the pairing and linking of exchanges, public companies today have more choices about where they list. The good news is that fewer now list on multiple exchanges because linkages make it easier for foreign investors to access domestic markets.
‘European issuers are already quite content with what they have because the access to foreign investors works quite well via the home exchange,’ explains Stefan Seip, head of market policy at Deutsche Borse. ‘There has been a trend in Europe where the major issuers tend to de-list from other European exchanges. So the German issuers who used to be listed in London, Paris and so on tend to de-list there and concentrate on their own exchange, knowing they can be accessed from all over Europe via electronic means.’
Seip says it’s in an issuer’s best interest to have all its liquidity concentrated on one exchange, and this can now be done without sacrificing access to international investors. He discourages companies from listing on multiple exchanges. Instead, he suggests they list on their domestic exchange or one that fits their specific profile.
Seip says the one exception is a second listing in the US market. The goal is not to win more liquidity or more US investors, who can easily trade foreign shares through local brokers, but rather to gain SEC registration. ‘They register fully with the SEC, write an American prospectus, and change their accounting to US standards in order to be accepted there. Then they can be ready to react if necessary and use their shares as a global currency.’ In other words, companies use their US listings to trade stock as acquisition currency, as in stock-for-stock deals. For this type of transaction a US listing is practically a prerequisite. A good example was Daimler-Benz’s listing on the NYSE. When the Chrysler deal came along, Daimler shares where already available as a US currency. It was its US listing that gave Daimler the freedom to negotiate its stateside merger.
‘The SEC has been rather hard-line in defending its position that the US regulations serve as a benchmark for the world,’ Seip continues. ‘It still does not believe in the concept of mutual recognition, which is the common concept in Europe.’
Mutual recognition is fundamental to the cross-border trading activities of European exchanges and is one key issue that would need to be addressed before any US and non-US exchanges could merge. By Seip’s account, ‘All the European exchanges are struggling with the SEC to become more active in the US. So far no European exchange has succeeded.’ Indeed, over a year ago the Deutsche Borse filed an application to set up trading screens in the US; it has yet to receive a response. ‘But the US market is the one and only exception,’ Seip says. ‘Today no company thinks of listing in another European country, just as no company in Europe thinks of listing in Tokyo, for instance, which was quite common before we had global electronic markets.’
New listings
The lack of common regulatory standards has not deterred companies from listing in the US, however. For the NYSE, foreign company listings have grown tremendously. In 2000, new foreign listings helped to add about $750 bn to the Big Board’s market capitalization – or the equivalent of the total market cap of Nasdaq’s non-US shares. These foreign listings are typically in the form of American Depositary Receipts, but that may be changing.
ADRs can only be traded in the US, and this is becoming problematic in the increasingly global environment. One alternative, which was pioneered by DaimlerChrysler and adopted more recently by UBS, is the global registered share which can be traded on the NYSE and on other markets. Incidentally, Canadian companies have used a similar model to trade in the US for more than 100 years; it’s only now that more companies are beginning to take notice.
The NYSE’s Georges Ugeux expects ADRs to diminish in popularity. ‘Maybe not tomorrow but certainly over a short period of time we hope to see the emergence of a completely electronic clearing and settlement system that will allow securities to trade around the world without any actual physical security having to be moved.’ This, Ugeux believes, is the wave of the future.
The world’s stock exchanges are racing into an era of unprecedented change and 2001 will likely be the most active year yet. While they continue to feel the effects of geographical, cultural and linguistic diversity, these differences are overshadowed by the need for world market transparency. Isolated national exchanges are quickly becoming extinct. Ironically, their successes and failures will depend on the same open market principles that have governed listed companies throughout the ages. Those that adapt to changing demands – of investors and issuers alike – will continue to thrive; those that are slow or reluctant to change will be overtaken by their competitors.
In just a few short years the scenario will look very different from now. And at that time we may all agree with what many are saying now: there has never been a time so kinetic.
