Vague deal puts doubt over single exchange
It is only four months since the introduction of the euro allowed all euroland stocks to be quoted in the new currency - and already stock markets all over the European Union are forging alliances. Former competitors are suddenly firm friends. Even London, which still works in old-fashioned pounds, is an enthusiastic partner. Peace, harmony and profit are breaking out all over.
That was the intended message of last week's announcement that eight leading exchanges had teamed up with the 'long-term objectives' of building a single, pan-European electronic trading platform for blue-chip stocks, with common rules and regulations. Joining the alliance, formed by London and Frankfurt last summer, were Paris, Milan, Amsterdam, Brussels, Madrid and Zurich.
The new members were expected to accept the common access programme and trading hours agreed by the British and German exchanges. Beyond that, the information was vague. The timing of the introduction of the new platform, for instance, was still no clearer than the 'after 2000' laid out in the original London-Frankfurt tie-up. And the apparent lack of progress on issues such as ownership of the platform left too many questions unanswered to generate real confidence.
Yet analysts do expect greater co-operation between European bourses in the longer-term. The market is already forcing them to change their ways.
Paris, for instance, was at first bitterly opposed to the Frankfurt-London alliance. It began shopping around for other partners and concluded a common access agreement with Zurich, which, like London, is outside the eurozone. But as early as last November it had joined the committee of European bourses and started the groundwork which led to last week's announcement.
The reasons for the about-turn are clear enough. In a single economic area, with a single currency, there will, eventually, be no more national markets in the traditional sense.
There will, for some time yet, be a difference in the range of stocks on offer from one market to the next. Germany for instance has no tradition of oil company share trading although Frankfurt's Deutsche Boerse has just agreed a joint venture with the New York Mercantile Exchange to launch the country's first energy exchange.
But creating new national markets will soon begin to seem less important.
Well before Frankfurt starts trading in energy counters towards the end of next year, the German investor with a yearning for exotic black gold will be happily trading in Amsterdam, with no exchange rate risk to worry about.
The same will apply in general blue-chip trades. Already, the key counters are available on most of the major markets. There is no great difference between the cost of buying a Siemens share, say, in Amsterdam, Paris or Frankfurt. If there were a difference, arbitrage would soon whittle it down. So if there's a software problem or a public holiday on the home market, the professional trader will simply make his trade elsewhere.
In fact, the process of convergence has been underway since the 1992 Maastricht Treaty establishing European Monetary Union. A comparison of the five biggest eurozone exchanges by Bankgesellschaft Berlin (BgB), measured by the performance of key indices on each market, shows differentials have gradually become smaller.
Slowly, the performance-gap has narrowed from approximately 18 per cent in February 1992 to around 7 per cent today. Since the introduction of the euro, the trend has appeared more clearly.
That does not mean every euroland market is now marching in perfect step, at a time when the 11 member countries are at very stages of the economic cycle. Finland's stock market has outperformed Portugal by 44 per cent since January, according to one report, while Germany, Spain and Belgium have all underperformed France.
What it does suggest is that, over time, the trend will be for investors to pile into the most efficient, cheapest and user-friendly market at the expense of the local stock exchange.
Size and power will matter more than location. French or Spanish investors, unless driven more by patriotism than greed, may abandon Paris and Madrid for Frankfurt or - once Britain joins the euro club - even London. To prevent mass defections, exchanges will have to innovate, specialise or develop niche positions.
The eight exchanges in the alliance all recognise the danger. Any exchange which tries to go it alone using different technology or market-making by telephone will be sidelined more quickly.
In the long-term, a single trading platform will not save the stragglers. It will only make desertion easier. But BgB analyst Michael Schubert believes market consolidation will not spell the end for the second-tier exchanges, because there will always be a demand for more than one market and location.
'We will not have just one eurobourse with a single hub. We will have a network of locations,' he said.
For the moment, though, competition rather than co-operation between the big exchanges remains the order of the day, whatever the posturing of the past week.
As an executive from one specialist regional exchange put it: 'Even a functioning partnership between London and Frankfurt seems almost impossible to achieve. The idea that you could get eight exchanges all working together under the leadership of London and Frankfurt is frankly incredible. They'll all end up blocking each other.'
