U.S. investors, firms could benefit from iX

OUTLOOK

London-Frankfurt deal ratchets up competition for U.S. exchanges

May 14, 2000|By Amanda J. Crawford

The London and Frankfurt stock exchanges recently announced that they plan to merge as well as form an alliance with the technology-heavy Nasdaq stock market of the United States. London and Frankfurt hope to build a pan-European trading heavyweight and a 24-hour global market in new-economy stocks - both unthinkable prospects only a few years ago. The British-German exchange, to be called iX, would be Europe's biggest by far and the world's fourth largest. It follows the announcement in March of a proposed merger of the Paris, Brussels and Amsterdam exchanges to form Euronext.

Do American investors stand to benefit from the consolidation? How about companies, especially as more and more of them extend their international reach? Will it affect the U.S. exchanges?

James Spellman

Senior vice president and director of corporate communications, Securities Industry Association, Washington

Right now, your average investor does not buy many securities directly of non-U.S.-based companies. They buy through the U.S. markets. But they do purchase through mutual funds. As these markets consolidate, they offer the promise of greater liquidity and more opportunities for price discovery. That would be a benefit to the fund because it could mean that the funds could buy or sell stocks more easily and also make those transactions at the best price possible.

It also will mean more opportunities for companies. Public companies will be able to access a bigger pool of investors, more easily, more globally and 24 hours a day. With greater global networks achieved through these stock market consolidations, you have bigger pools of capital to tap into and bigger pools of investors.

It's another type of competitive pressure for U.S. markets. It's going to help the New York Stock Exchange rethink what their business model is and how they tap into foreign markets. The real challenge of the U.S. markets today is they do have, in terms of U.S. listings, a defined universe of securities they can trade. For them to grow sharply, they need to trade more non-U.S.-based companies.

Matthew Spiegel

Professor, Yale School of Management

It's generally a good thing to have trade consolidated because it gives you more people to trade with. It probably will benefit American traders.

It will probably benefit companies because it would make their securities more liquid to have more people trading in one place. That would lower their cost of capital. So they would benefit from that. On the other hand, American firms, if they are going to do an issue overseas, they may have gotten London and Frankfurt in a bidding war over how they would treat the firm. I don't want to come off as saying the exchanges would give them a break. But I think we shouldn't underestimate the value of competition among exchanges.

I think the American exchanges will probably not be tremendously happy with this. You have now created a new, bigger exchange in Europe. They are a more formidable competitor. To the extent they might hope to get more European listings, this will inhibit their ability to do that in the future. Europe, with its fragmented market structure, has never been able to offer as low of listing costs. London and Frankfurt, by merging, can potentially take some of that away because they won't be as inefficient, and they may be able to offer more liquidity and lower trading costs.

Lynette Schroeder

Portfolio manager and senior analyst, Driehaus Capital Management, Chicago

I think American investors who are holding foreign shares, particularly European shares, are likely to see some benefit from the merger, simply because there are arguments that settlement charges may come down because the Germans' Deutsche Borse has a system that is lower-cost. Anytime you keep an existing system and put more volume for it, that should drive down cost. Also, the link that iX may potentially have with Nasdaq - that sort of familiarity could make people more comfortable investing abroad.

Clearly, if Nasdaq becomes part of the iX, they will be linked more closely with the European exchanges. There is a general feeling among all of the exchanges worldwide that 24-hour trading is becoming more and more of a reality. The existing exchanges need to address this.

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