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European Affairs
The Revolution in Europe's Stock Markets: A View from Paris
by Alain Monod-Broca
Seen from the United States, the European marketplace always seemed crowded: So many exchanges in a region which is roughly the size of the United States! But new technology in Europe and the United States is enhancing competition, and should eventually lead to a consolidation of the European stock exchanges. I think that this consolidation will happen, but maybe in unexpected ways.
The exchanges in Europe are different from their US counterparts. Many of them are already corporations belonging to their shareholders as opposed to membership-based associations like NASDAQ or the New York Stock Exchange. And they are more nimble. On the technical side, many of our markets switched to electronic trading early. Paris started computer based trading in 1987, and closed its floor in 1991. The following year, the complete cycle of investing, from order routing to settlement of the transactions, was 100 percent electronic. The other European countries followed much the same path. We now have a long track record of implementing, operating, and fine-tuning big computerized trading networks.
This means concrete advantages for investors and brokers. For instance, a survey by Institutional Investor magazine in 1997, and again in 1998, ranked Paris as the world's cheapest stock exchange, and among the most liquid. Instinet, the first ECN (electronic communication network), which has been a member of many European Stock Exchanges for many years, has never been and still is not a threat to official exchanges. In the United States, on the other hand, it competes with NASDAQ for trades.
Our estimate is that 98 percent of the trades covering French listed issues take place in the Paris Bourse SBF SA computerized trading system. In London, Tradepoint, which has been around for years, is still not a competitor to the LSE. This rather pleasant environment does not mean that we can rest on our laurels and, in fact, we are not doing so.
Many announcements have been made in Europe concerning alliances and a unified market. One must recognize that many of those announcements led nowhere. But if we consider what has been done by the eight biggest European exchanges during the last 18 months, we can see that at last something has changed: collaboration has started in earnest and is gaining momentum.
A small part of the market is now accounted for by the "nouveau marché," which was started for the Gulf Company and aims to be the equivalent of the US NASDAQ. It was a European market from the very start, and our plan was to link it with similar markets in other countries. Now, there are five markets for growing companies in France, Belgium, the Netherlands, Germany, and Italy which are linked. By "linked," we mean that any broker member of one market may work on the other markets, and that they are mostly electronically connected. This is a very concrete example of the way the exchanges can work together and make a platform that can be seen by investors and brokers as a single market, even if it is technically an interconnection, or network of markets. But these markets are only just starting and cannot be compared to the old stock exchanges.
On the traditional exchanges, too, however, a set of decisions has been announced, and I think that we can assume that they will be interconnected. On July 7, 1998, London and Frankfurt decided to create a single market for their Blue Chips, and the system was subsequently extended to six others - Amsterdam, Brussels, Madrid, Milan, Paris and the Swiss Börse. Switzerland is not part of the European Union but always cooperates with us - which is very important because Zurich is the world's sixth largest exchange. In May 1999, in Madrid, those eight exchanges signed a Memorandum of Understanding, in which they pledged to work together to harmonize market rules and to build a pan-European market for the most actively traded securities. We are beginning to see some small initial results. Last summer, London and Paris changed their hours to get closer to the 9:00 a.m. to 5:30 p.m. CET (Central European Time) agreed by the eight exchanges.
Technically, Paris is being linked to Zurich and Milan, so that any broker member of one stock exchange may easily trade on the others. Last but not least, the eight largest European stock exchanges have agreed on a defined structure for the market starting in November, 2000. There has been a tough struggle between proponents of an order-driven market like the New York Stock Exchange and supporters of the price-driven market used by the ASD (American Security Deposit). We decided to have an order-driven market. It will be an electronic platform, with no floor, and it will be continuous, with eventually some fixing. Now we know exactly where those stock exchanges want to go, and we have resolved most of the difficulties. I think, for instance, that the London/Frankfurt Stock Exchange did not function properly the summer before last because there were very different concepts and types of markets. Now, the network of markets should start this year. Back office systems are converting too.
International links are also being developed. The French futures market has been working with the Chicago Mercantile Exchange for years now. We are opening a link with the Singapore futures exchange SIMEX, and will be closely integrated with the Milan and Madrid futures exchanges. This means that we will be able to fulfill the requirements of all the big international banks, which are to simplify stock exchanges, save on fees, and to give single access to as many listed issues as possible - even if we are slightly late. We had hoped to be ready for the launch of the euro in January, 1999.
But I think we are now going at the right speed in the right direction. Europe still has 34 exchanges, including Eastern Europe, but sometime in the future we will certainly see a much reduced number. European stock markets will soon be as easy to understand, and to browse, as their US counterparts.