The race to a single European exchange

Imagine a single stock exchange on which you could trade freely in the shares of any European company - an exchange where you could buy Deutsche Telekom as conveniently as BT.

This is the dream of investors, stockbrokers, finance directors and politicians across Europe. But although breakthroughs in communications technology are finally making this possible, the complex network of regulatory regimes, differing tax structures and vested interests of existing stock exchanges have slowed the pace of change. At the same time, new agreements seem to be announced every month, of which the one between the Paris, Amsterdam and Brussels exchanges is the latest.

But all of these arrangements still adhere to the single aim of creating a pan-European trading platform. As the euro continues to develop and technological advances in trading and settlement expand the possibilities of the world's stock exchanges, such an aim is inevitable.

The Benelux exchanges set the ball rolling and the link-up of technology markets which became Euro NM added momentum. But perhaps the most significant initiative was the announcement in July 1998 of plans to link up the London Stock Exchange and Deutsche Börse. The Madrid, Milan and Amsterdam exchanges soon expressed an interest in becoming involved.

The ultimate aim of this alliance is to create a pan-European exchange that functions more efficiently and cost effectively than the current arrangement of 29 separate exchanges and 17 clearing systems. As well as the technical issues which need resolving, there are complex matters arising from political considerations: exchanges may not wish to be seen to play subordinate roles to London, Frankfurt and Paris. Stock exchanges are a source of national pride and many countries will not want to see theirs subsumed into a large organisation in which others play more significant roles.

Historically exchanges were established on a mutual basis for the benefit of members and were protected by regulations. Now they increasingly recognise the need to change and to adopt a structure and strategy that works for the benefit of their customers, enabling them to combat issues such as cost reduction and the challenges of e-commerce.

Ownership of the London-Frankfurt alliance was to have been discussed following agreement on rules and technology, but London always maintained that ownership should reflect the proportion of UK versus German stocks traded.

Arguments have arisen over the location of the pan-European exchange. Since it is due to be an entirely electronic system with terminals located throughout Europe, this should be a minor issue. Other areas of debate include the management structure, regulation, indices, trading rules and the technology to be used. The risk is that unless these areas of disagreement are resolved quickly, the delays incurred will effectively hand the initiative to new cross-border electronic communication networks (ECNs) such as Posit and E-Crossnet, which may well steal valuable market share. In the US, ECNs already account for large volumes of stock traded on Nasdaq and they have the capacity and the knowledge to influence events significantly in Europe.

Most market participants think a move towards alliances is inevitable. Whether this means a pan-European alliance or a series of networks is less clear. Some people point to the damage that could be caused if European markets become excessively fragmented, with a two-tier or multi-tier market developing. This could not only damage the price formation process but also widen the valuation gap between large and smaller capitalised stocks.

Global investors, in particular, are likely to focus their attentions on the major European blue-chip stocks as these offer the greatest liquidity. Some national exchanges are concerned that this may severely deplete the value of stocks they can offer - in some cases this may even threaten their survival. But companies would clearly benefit. A single trading platform and a single settlement system would enable them to avoid the expense and administrative complexities of multiple listings and the need to comply with different sets of regulations.

A recent and significant change in how investors think (and consequently in how analysts and brokers now structure themselves) is the emergence of sectoral investment. Analysts formerly expected to be expert in certain countries are now more likely to specialise in European business sectors. A single exchange will accelerate such investment patterns.

The move towards alliances is not a new phenomenon. In the recent past London has made more than a dozen attempts, without success, to merge with other European exchanges and in the past two to three years several co-operative agreements have been signed in the EU. But what is new is the threat posed by the emergence of ECNs which can attract significant volumes of trade from conventional exchanges.

Exchange moves

A London Stock Exchange/Deutsche Börse move to set up a trading platform for the top 300 European stocks has now been agreed. Both exchanges have encouraged their member firms to become reciprocal members. While members of the London exchange who wish to trade on Xetra (Frankfurt's electronic trading platform) are to be treated as remote members, brokers from Frankfurt will only be able to access those shares in London that are on Sets (Stock Exchange Trading System, the screen-based, order-driven trading system for the 140 largest companies on the exchange). They will belong to a new membership category: Sets participant. From January 1999 the London Stock Exchange stopped providing prices for German stocks on SEAQ International and Frankfurt similarly.

Direct access between the Amsterdam, Brussels and Luxembourg exchanges was implemented from the start of 1999, allowing dealers to trade stocks listed on the other exchanges from their home platform. At present this cov

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