The competition between Europe's stock exchanges
Things have changed at Europe's stock exchanges. The past year has been an adventurous one for many of the region's bourses - which, in itself, is change enough. But the year ahead offers the prospect of more radical moves, wider choice and spreading conformity.
Although you won't get many of the exchanges to admit it, increased competition is the driving force behind the innovations, fuelled by an unprecedented demand for equity stocks. Yet, ironically, the competitive pressures are also leading to cooperation between exchanges in some areas as leading bourses unite to ward off new threats.
Cross Border Presence
One of the underlying factors in the initiatives for collaboration and linkage between western European exchanges is the European Union's 1996 directive on investment services. Among other things, market makers in one EU country must be allowed to become members of other national and regional exchanges without having a physical presence in the area. Although six countries (including Germany) have yet to implement the directive's provisions, and few of the others have implemented it fully, remote membership of some exchanges is growing, particularly as international bankers and securities houses realize - and seek to profit from - the enormous potential of Europe's burgeoning equity markets.
Also gathering strength across Europe is a belief that stock exchanges should no longer be owned solely by the brokers and their interests. The Stockholm exchange is now a listed company in its own right, and Amsterdam Exchanges has sold half its equity to its listed companies and to institutional investors. The Milan exchange is in the process of being privatized, with the expected split being 50:50 between investors and members. In Copenhagen, traders own 60 percent of the company running the exchange, with equity and bond issuers each owning 20 percent. Stanislas Yassukovich, a former deputy chairman of the London exchange, says that these sell-offs will help the markets. 'Too many exchanges have seen themselves as agencies of the state. A commercial ethos is needed.'
The London exchange is facing growing pressures from a number of sources. Not only are the continental exchanges competing more fiercely and winning ground in many quarters, but the market's ownership by its members is being questioned. Political and economic groups are calling for the exchange to be demutualized and for outsiders to have more of a say in the way the exchange operates.
Throughout Europe, exchanges are having to come to terms with a changing environment. Greater transparency and tighter regulation are the by-words of the late 1990s: market makers and listed companies are being forced to move with the times.
Nowhere is this more apparent than in Milan, which has for years been a somewhat haphazard and poorly-policed operation, resulting in a serious lack of confidence among investors. A former deputy director-general of the Bank of Italy, Tommaso Padoa-Schioppa, has been appointed as the new head of Consob, the Italian stock market watchdog, and he promises a considerable shake-up in the way things are done and regulated.
Milan has a long way to go, though. Most quoted Italian companies are illiquid and the lion's share of trading is in the stocks of the leading 30 companies. What is in Padoa-Schioppa's favour, though, is the emerging preference of Italian investors for equity.
Open to Risk
This change is mirrored throughout the region. Traditionally either fixed-income investors or hoarders of liquid assets such as cash or gold, continental European investors are fast becoming equity markets players. Like elsewhere, this altered preference has been boosted by the proliferation of privatization plans.
A second push for change in the markets has come from the growing demands of entrepreneurial companies for domestic markets on which to float. Spurred by the initial success of London's Alternative Investment Market (Aim), there have been rising calls for the European bourses to provide accessible and regulated trading facilities for home-grown companies. Equally, while some European high-tech and high-risk companies have floated on Nasdaq, often instead of venturing onto their own domestic senior or junior markets, there has been an increasing demand for European exchanges to set up suitable tailor-made facilities for such special-needs enterprises.
The third drive for change has come from the market makers and intermediaries. Drawn by the huge potential of the nascent mainland European markets for non-mainstream flotations, and the massive fees and profits to be earned from IPOs, overseas banks, finance houses and venture capitalists are frenetically opening European offices. To make these new operations worthwhile, they are energetically searching for potential flotation candidates and bringing significant pressure to bear on the bourses to provide mechanisms and networks to support the debutants and their comparatively riskier and more speculative equity.
Four of the larger European exchanges have come together in EuroNM, to attract developing high-growth and high-tech companies on to the market. The participating exchanges, while decentralized, share the same market regulations, as well as listing and membership requirements, and have pooled marketing resources.
The first move was made just over a year ago with the launch of the Nouveau Marche by the Paris Bourse, which has now linked with similar initiatives by the German, Belgian and Dutch exchanges. With 24 companies listed on the new market in Paris after its first year, only two on Frankfurt's Neuer Markt, one on Amsterdam's NMAX and one on EuroNM Belgium, the network is taking off somewhat slowly.
The Nouveau Marche, says Didier Lombard, director general for industrial strategies at the French industry ministry, will continue to strengthen its position and consolidate European ties. 'The year ahead looks promising indeed: around 30 new companies are likely to join and in so doing enhance the market's representation of technology-driven industries.'
Christian Deblaye, fund manager for Rothschild's nine-month-old Europe Discovery technology-oriented fund, has reservations. 'The market has lived up to its promise to listed companies, allowing them to raise capital to finance business development. But the risk involved makes it a market for informed investors only. We expect companies to be forthcoming with information.' Following a recent rule change, companies listed on the Nouveau Marche must now publish quarterly sales data and other business indicators.
Hoping to emulate the success of Nasdaq in the US, late last year a group of European bankers and brokers launched Easdaq, run on the same lines as Nasdaq and designed as a tightly-regulated, pan-European market for high-growth companies. Many European companies have listed on Nasdaq, and Easdaq's promoters hope to establish a viable European alternative.
Easdaq has not lived up to its promoters' initial expectations, however. Just eight companies have listed to date, but there are indications that more companies will come to the market in the next year or so.
Jacques Putzeys, Easdaq's chief executive, says that progress has been slow because there have been an 'enormous number of demands for listing' but the exchange's high standards have led to many applicants being turned down. 'We're going for quality rather than quantity, and there are some very good companies coming.' The Easdaq team have made it known that they expect some 50 companies to be listed on the exchange by the end of the year. Critics suggest that the exchange has probably made a mistake in touting around the target figure as it may lead to lower quality companies being accepted towards the end of the year in a bid to meet the magic number.
'Easdaq will succeed,' says Yassukovich who is now Easdaq's chairman, 'because it's independent, with a free-standing structure and high-quality regulation. We have high admission requirements and strong rules, including quarterly reporting and adherence to US Gaap and IAS accounting standards.'
European exchanges have spent a great deal of money on the development and introduction of electronic trading systems. The Moscow market, for instance, has the electronic Russian Trading System, which is now recording daily turnover in excess of $50 mn. The new Swiss Exchange (see box) is inordinately proud of its optical fibre cable system, promoting itself as 'the world's first fully integrated electronic marketplace' where transactions take less than two seconds from order to settlement.
London's Crest automated settlement system has been up and running for nearly a year now and has suffered from a number of disruptions. Serious questions have been raised about the new system's ability to cope, particularly with the massive surges in trading expected from the current wave of building society demutualizations and flotations.
Iain Saville, Crest's chief executive, has no doubts about the system. 'Both the market and Crest are now prepared for increased volumes during 1997. We will be equal to the demands placed on us by the market this year.' London also plans to move to an electronic trading system within the next year, although this strategy is not one that has won unqualified support from a majority of market makers.
There are increasing proposals for closer working relationships between neighboring exchanges, ranging from calls for a pan-European exchange across the single currency area to those for more localized link-ups. For some time, for example, there has been talk about a pan-Scandinavian exchange linking the Copenhagen, Oslo, Stockholm and Helsinki exchanges.
Mergers of internal equity, futures and options markets have already taken place within the four Nordic countries and a regional link makes perfect sense, says Poul Erik Skaanning-Jorgensen, deputy director of the Copenhagen exchange. If the four were to link their exchanges, he says, it would be the fifth largest equity market in Europe and be much more attractive to international investors, who currently regard the separate markets, with the possible exception of Sweden, as too small.
Perhaps the most ambitious plan for alliance is that nursed by the Paris bourse, which last year recorded the highest activity levels in its history. Exchange leaders talk energetically about a structural and working link with other European exchanges, particularly those in Germany and Belgium.
There is every expectation that the continental European markets will - either individually or collectively - become even stronger, but there are several problems that must be addressed before investors are likely to feel really comfortable. Predominantly, the questions of regulation and information flows must be answered swiftly in many of the exchanges, along with matters of corporate governance, trading systems and shareholders' rights. The adoption of stricter listing conditions, such as those operating in London or New York, and more structured - and frequent - reporting will go a long way to settling investors' doubts.
Andrew Beeson of stockbroker Beeson Gregory believes the future is going to be good. 'Mainland Europe has a huge potential to produce IPO candidates, with companies moving away from bank financing as a source of capital. A lot of institutional muscle is currently in London but that will change: the market will go to where the companies are.'
Electronic Dreams Become Reality
Margaret Studer reports on the revolution in Swiss equity trading
The Swiss Exchange today is one of the world's most advanced, largely revolutionized by global competition that threatened to destroy Switzerland as a securities' trading centre.
It became clear at the end of the 1980s that unless the Swiss market was made more attractive for institutional investors, trading in Swiss blue chip shares would increasingly move to London. At the time, trading in Swiss stocks was regionalized with seven exchanges competing for business, splitting trading volumes and reducing liquidity. Swiss companies lacked transparency as they hid behind laws demanding minimum disclosure. The takeover of a Swiss company was difficult, if not impossible. To put it mildly, the Swiss market was plain dull; and London's Seaq was snatching double-digit chunks of trading in giant Swiss multinationals.
What to do? In 1989, Switzerland launched the Swiss Options and Financial Futures Exchange, a global first in being fully-electronic through trading, clearing and settling. And Soffex was national - no regional boundaries and divisions to mar performance. Stock exchange officials began to dream that the options and futures exchange could become a model for all securities dealing.
It was a painful process. A first attempt to construct an electronic exchange for all securities was a failure. However, with global competitive pressure mounting, officials decided to wipe the slate clean and start again. In 1992, a further project was launched and regional exchanges agreed to forget jealousies and merge. The resulting electronic exchange opened in 1996 at a cost of SFr 635 mn.
When trading got underway in August last year, there were the usual high-tech teething problems as traders became used to the system. But today, according to leading financial analysts, the Swiss market is much more attractive for institutional investors. In 1996, turnover on the Swiss Exchange was up 27 percent to Sfr 837 bn from Sfr 660 bn in 1995.
As there are no longer any regional exchanges, but one electronic national exchange with traders working from their banks' trading rooms, there is more volume and narrower spreads, says Mirko Sangiorgio, who heads Swiss stock research at Pictet & Cie in Geneva. Thomas Pfyl, director of Swiss research at Bank Vontobel in Zurich, suggests that the electronic exchange is 'more transparent and efficient.'
For example, all shares are traded continuously, not only a handful of blue chips as before; the electronic exchange is order-driven, bringing about automatic matching of trades; most trades must be executed over the exchange, and very large volumes traded off the exchange reported within 30 minutes of their execution.
Adds Gilbert Puder, a financial analyst at Bank Sarasin in Basle, 'there seems to be a brake on Swiss blue chip trades lost to London.' Indeed, Swiss Exchange spokesman Michael Staehli goes so far as to claim that reforms within the Swiss market have brought about a stop to London's inroads on Swiss blue chip trading. Although, he admits, there are no reliable figures available.
Nevertheless, an imposing memory of how trading used to be remains. A giant stock exchange building dominates a corner of Zurich's Selnau district, served by its very own subway station. Opened in 1992 at a huge cost to the city, now that the traders are gone it's more of a lonely white elephant.
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