Ten exchanges to create global stock market

"The (GEM) global equity market project is the first attempt to create a world exchange working 24 hours a day," Euronext President Jean-Francois Theodore said in a statement. Euronext, the planned merger of bourses in Paris, Brussels and Amsterdam, said working groups were already in place to discuss round-the-clock trading in the 10-fold alliance. "This is something that has been predicted and speculated upon for some time," said Lee Cook, head of European equities trading at US investment bank JP Morgan & Co.

"I am a little surprised by the participants. It’s a big drawback that the LSE and Deutsche Bourse and Nasdaq aren’t involved," Cook said. GEM would trade in big name, international stocks by linking exchanges in three time zones – Asia-Pacific, Europe-Middle East-Africa, and North and South America.

Order-driven trading in blue chips from the 10 exchanges would be traded in an order book passed from one time zone to the next, with regulation for each listing still coming under its domestic watchdog, Theodore said in an interview on CNBC Television.

Rapid advances in trading technology and a thirst by investors to trade along sector rather than national lines is making global trading in the big liquid blue chips inevitable, but not easy. "There are some real difficulties in doing so, both from a regulatory and technology reasons," said Thomas Krantz, deputy secretary general of the International Federation of Stock Exchanges (FIBV), to which all the world’s leading bourses belong.

"Don’t look for a worldwide capital market tomorrow, but just because the challenge is daunting, it does not mean that it’s not worth trying to do some of it," Krantz added.

Investment banks who already operate globally and generate most of the world’s trading volumes welcomed the 10-bourse plan, but were concerned that it would create a division in markets and leave the questions of clearing and settlement unanswered. "There is a growing need to provide 24-hour, global coverage for our clients and any move towards that is positive," said JP Morgan’s Cook.

Sadakazu Osaki, head of the capital market research department at Nomura Research Institute in Tokyo described the plan as "epoch-making". "This (plan) would eventually divide global stock exchanges into two powers – one led by the iX, Nasdaq group and the other by Euronext, NYSE, TSE and others," Osaki added.

Martin Korbmacher, co-head of Global Equities at Dresdner Kleinwort Benson said making the GEM plan work would be tough. "I’d actually be very surprised if we are really much further on than the stage where everybody is talking to everybody else," Korbmacher said. "It would be very difficult to do."

Korbmacher said a key difficulty would be settlement of equity trades which have different cycles because of the three time zones involved. Investment banks say a seamless cross-border clearing and settlement system would help cut trading costs to a much greater extent than regional or global trading platforms would, and the 10-bourse announcement makes no mention of this aspect.

The LSE said it was not holding any talks with the group of 10 exchanges as the London exchange focused on completing its merger with Frankfurt. "There are no current plans to enter into agreements with anybody else at this time," an LSE spokesman said. The iX merger is facing opposition from British retail brokers, fearing huge changeover costs.

Concerns about iX intensified on Wednesday when Europe’s biggest chemical company, BASF of Germany said it and several other German blue chips were uneasy about the merger, complaining they had not been properly consulted in advance.

BASF and others worry that Frankfurt’s DAX index could be scrapped, which could prompt investors to cut their holdings in German blue chips. The Deutsche Boerse said German blue chip concern was unjustified and the DAX index would remain as long as needed.

NYSE and Euronext were already in tie-up talks, and on Tuesday, NYSE Chief Executive Richard Grasso said NYSE aimed to finalise a plan to link with Euronext in the next few months. Euronext has said it hopes eventually to strike an alliance with the NYSE to rival the mighty iX-Nasdaq tie-up.

Last year the TSE, Japan’s largest stock exchange, began talks with the NYSE on a cross-trading structure. Soon afterward Japan’s second-largest bourse, the Osaka Securities Exchange, decided on a tie with Nasdaq, making a global alliance even more urgent for the Tokyo exchange.