European stock exchanges as we know them are about to be completely transformed thanks to London and Frankfurt.
Europe’s two largest markets last week announced they would end decades of heated rivalry and form an alliance to develop a pan-European market in the hope that soon all European exchanges would take part.
While some people have called the merger a marriage made in heaven, many people have not been quite so enthusiastic, least of all the French, who feel left out of the deal. Until the July 7 announcement, the Paris Bourse believed it was the one going to the altar with Frankfurt.
Behaving like a jilted lover, Michel Freyne, head of the French Bankers’ Association, could barely conceal his anger, condemning “the clandestine nature of the negotiations” between London and Frankfurt which led to the merger.
The alliance also came as a surprise to Europe’s financial community. As the world’s third-largest stock exchange, with a market value twice the size of Frankfurt, London didn’t need a partner, or so many people believed.
But London and Frankfurt have been in fierce competition to be the leading marketplace for European stocks when Europe’s new single currency, the euro, is introduced in January.
The advent of the euro is expected to force European markets to consolidate and eliminate the currency risk for investors buying stocks across national borders.
Frankfurt will be the home of the new European Central Bank, which will manage the euro, while London is the capital of a country that has, so far, opted to stay out of the single currency.
The alliance now means that London will remain a vital European financial centre. One British fund manager said this alliance was “an incredible move” and “could potentially be second in size only to the New York Stock Exchange”.
But it doesn’t come without some risk. The two exchanges have already agreed on a 50/50 split even though London hosts 107 of Europe’s top 300 stocks compared with Germany’s 37. If more exchanges are added as equal partners , London’s interest will shrink.
The plan is for the London/Frankfurt alliance to be the core of one European stock market that will eventually be based on a common electronic trading system and allow investment by sector rather than in each nation.
For example, investors could go to their broker or bank and deal in either British Telecom or Deutsche Telekom with no fuss. The new system will allow dealers all over the world to buy or sell shares in different European companies in a single currency on a computer screen.
No more trading floors, screaming traders throwing around bits of paper or messy currency conversions. It’s a long way from the old coffee houses where the English first started trading shares 200 years ago.
Also on the upside, the alliance will reduce costs, generate a wider shareholder base and give companies access to more capital. The downside is that they will have to have the team ready for play by January 4 1999 and six months later have their rule books harmonised, trading hours synchronised and market conventions consolidated. This is the point where other European exchanges could easily become part of the alliance in the hope that they will generate so much business it will force the other exchanges to join them.
The stock markets of the 11 euro countries and Britain were valued at about $5,5-trillion at the end of last year, half as big as the United States market and twice the size of the Japanese market, according to Smith Barney Salomon.
But the growth prospects are huge. The European economy is slightly larger than that of the US and there are likely to be scores of privatisations by European Union governments in the coming years.
Attitudes towards a pan-European stock exchange vary. The Paris exchange said it would consider joining the alliance after getting answers to technical and political questions, including, “Why didn’t you tell us about the alliance beforehand?” and “How do you plan to include the other exchanges?”
A representative for the Amsterdam exchange said officials would discuss the alliance but continue to support their own vision of electronic ties between national exchanges.
The Swiss exchange, which is already in a joint venture with the Frankfurt Deutsche Bourse in the futures and options side, said it was not informed of the alliance and would consider it a ” new competitor”.
Brussels won’t rule out accepting an invitation to join, but they wouldn’t do anything without discussing it with their other partners, Amsterdam and Luxembourg. Milan’s Stefano Preda commented that “there are likely to be more significant difficulties than meet the eye”.
Werner Seifert, chief executive of the Frankfurt exchange, tried to calm tempers by saying the alliance would go forward and other exchanges would be kept informed. “We will share the results of our research with them. Then we shall see if we have the same beliefs.”
There will also be an impact here in South Africa as some large companies desert the Johannesburg Stock Exchange for larger European exchanges.
For example, Billiton and Old Mutual will in future be listing in London. Some companies already have dual listings in Europe and South Africa and will benefit by the wider exposure.
The exchanges throughout Europe have been left stunned and wondering what their future holds. A wait-and-see attitude seems to be the order of the day until they can determine whether they will also walk down the aisle in the Anglo-German alliance.
Next week: South-East Asia