| Death
of all national stock exchanges
Archive article Oct 1998 and
Update comment
National stock exchanges cannot possibly survive.
The London stock market will disappear altogether, as will every
other national exchange in Europe to create a Pan-European Exchange.
(This feature by Dr Patrick Dixon,
was published in The Times 19/10/98, see also feature
in Time magazine 4/4/99 and update comment below.)
The process could be complete in less than a decade
with huge consequences for every financial institution in Europe
and beyond. The impact on commercial and residential property prices
in "exchange" cities such as London is likely to be negative
and long lasting.
The very idea of a national stock exchange is a throw
back to an ancient era when people still breathed the same air in
order to trade. The rot set in the moment that electronic trading
began, forever separating deal from the dealer. In that moment the
London stock exchange became nothing more than a computer server
in a basement. London should have seen the writing on the wall when
the Liffe market suddenly found earlier this year it was losing
the Bund contract to Frankfurt’s more efficient new electronic
trading system. A deal was struck in July with a proposed link between
Frankfurt and London but an unstoppable process is continuing.
Three weeks ago (29 Sept 1998) General Paul Arlman,
Chairman of the Federation of European Stock Exchanges declared
the new London – Frankfurt alliance so powerful that it "will
have an impact on the entire European market", possibly leading
to one European Exchange – a step that seems ever more logical
in the light of monetary union.
Of course, such a switch is technically straightforward:
simply a question of which computer server lands up in which basement
within a new regulatory framework. There is some resistance from
exchanges who have spent a fortune creating incompatible electronic
platforms of their own, but not enough to prevent a stampede into
new alliances.
Eurex Chief Joerg Franke is talking about linking
with Liffe. His goal is a single European platform for derivatives
trading. The new Eurex, formed from Germany’s DTB futures and
options exchange and Switzerland’s SOFFEX is now in talks with
France’s MATIF about a common platform and clearing system.
Werner Seifert, head of the German Borse said recently
that he is seeking new partners for the London-Frankfurt alliance.
Other exchanges in Europe are reconsidering their survival with
ripples felt in America where Chicago’s Board of Trade has
just approved a new global trading alliance with Eurex.
The trouble with national exchanges is that they embody
national pride and psyche. Every day, Swiss investors watch movements
on their Borse with a mixture of pleasure, alarm and pride. The
British and Americans likewise can hardly conceive of the death
of their own markets.
There are other pressures on these ancient exchanges,
caught in a late twentieth century timewarp. In a globalised world
multinational companies want multiple listings, allowing their stocks
to be traded across every time zone.
The notion of a multinational trading only in the
country where its historical HQ is based is a nonsense. Multinationals
are voting with their feet, running away from national exclusive
listings.
Then there is the Internet: already 25% of all trades
in the New York market are via the net, but we are still in the
first ten minutes of the digital age. The transformation has hardly
begun.
Who needs old stock markets anyway? At least one company
has floated stock on the net, without using a traditional market
at all. What is there to stop me selling my own share certificates
on a bulletin board? What would happen if – say –
ten medium sized companies created their own co-operative exchange
just for their own shares, on the net, with 365 days a year 24 hour
access, and ultra-low costs? What would happen if two or three major
financial institutions began to experiment with creating a broader
cyber-market, using the latest security encryption?
So then it is inconceivable that national exchanges
in their current form will live beyond 2010. Expect major convulsions
long before then. Once Europe begins to trade on one exchange, it
would only take one other major player to announce a link to set
in motion a rapid chain reaction. The result will be a single global
exchange trading continuously, which raises the spectre of a rolling
world market crash at some point in the not so distant future. Some
exchanges might chose to remain outside the global trading alliance,
but their longer term future will be uncertain. Key issues in any
new formations will be trading confidence: liquidity and security.
Both these barriers will be overcome, with time. Confidence comes
with use, and with confidence volumes and value of trades begin
to grow.
But the bigger questions are these: what happens to
banks? What happens to brokers? What happens to communities of finance
sector workers, in a virtual world?
Many banks are in serious "digital" trouble
as it is. A gathering crowd of non-banking competitors is already
taking their business, ranging from supermarkets to airlines.. Exchanges
exist to serve their members and their members are banks and most
banks are dinosaurs. This is a fundamental weakness of the structure
of exchanges.
From the investors point of view, trading on-line
should be simple and low cost, enabling someone with a computer
in a hotel room to directly buy and sell in the market. But members
insist that all trades are done via members, who cream off profits
for doing nothing except transmitting an electronic pulse from their
server to the exchange.
What would happen if a stock market decided to allow
direct internet access? Members would rightly condemn the move because
it would mean the exchange was setting itself up in direct competition
with the banks themselves.
There could be a creative option: allow all the banks
a share in a new company set up exactly for this purpose. But that
would defeat the point of abolishing an intermediary altogether.
Middle men of any kind are redundant in a digital world. They get
in the way and cost money.
So then, the industry is in for a huge shaking. Life
will not be more of the same. With commission rates falling towards
zero, old-style brokers will be unable to make a living. They will
only survive as financial advisers. But most small to medium investors
will object to handing back every penny they have saved in commissions.
Job losses are inevitable. The process is well under way.
Communities of financial expertise will continue to
be found in places like London, even if a regional or global server
is based elsewhere, because quality people often need more than
money to relocate and big national exchanges have attracted relatively
immobile but highly skilled labour forces.
However, it is questionable how long that geographical
bias will last. In virtual world any traders anywhere in the world
with the rights skills can be welded into a global investment team.
Stock Exchanges such as London, New York and Tokyo need to wake
up, move fast and try to take the lead. Either we take hold of the
future or the future will take hold of us.
 |
Update 7/7/99:
Merrill Lynch, Goldman Sachs and Bernard Madoff Investment
Securities aims to be first with internet auction for market
in shares which will be called Primex Trading. Meanwhile
Wit Capital is aiming to offer out of hours trades in US
popular stocks very soon. |
|
Update 27/11/98:
European Federation of Stock Exchanges - meeting in Paris
to issue a memorandum of understanding on future co-operation.
Behind the scenes discussions involving the French and the
new LonFurt Exchange. Is it too late for the Paris
Exchange? A Pan-European Stock Exchange is moving
ever closer. |
|
Update 27/11/98:
Reaction to the article above - universally the same - "You're
right, inevitable, bound to happen". So why has
no one said it before? Reason: existing markets
have been trapped in late twentieth century structures -
future-blind. But the future is so obvious once it's
spelled out - you can never unsee what you have seen - we
may argue about timescale but the process is beyond dispute. |
|
Update 4/4/99:
Time Magazine feature
by Dr Dixon |
|
Update 2000:
What more can one say - a stampede continues across all
European exchanges to form new alliances while new entrants
continue to change the landscape themselves. The collapse
of London and Frankfurt negotiations in September 2000 makes
the whole process even more absurd since all the exchanges
are being overtaken by other events. |
Dr Patrick Dixon
is director of Global Change
Ltd, and author of Futurewise
– Six Faces of Global Change, published by Harper Collins
£16-99. This article appeared in The Times 19 October 1998.
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