Europe takes first step towards single stock exchange

Yesterday's planned merger of Frankfurt and London bourses creates Wall Street rival.

The historic merger of the London and Frankfurt stock exchanges announced Wednesday will create Europe's largest equity market, and appears to be the first step in the creation of a coalition of European financial markets.

The merged exchange, to be known as international exchange ("iX"), and with headquarters in the British capital, promises also to make Europe into a potent counterweight to the New York Stock Exchange.

Preliminary agreements were also signed yesterday to bring stock exchanges in Milan, Italy, and Madrid, Spain on board.

Gavin Casey, chief executive of the London stock exchange, said the merger was "a marriage of equals" and that iX would have "greatly enhanced clout" in world financial markets.

The two exchanges are merging on a fifty-fifty basis, even though London is much larger than its former rival, Deutsche Boerse. There merger is expected to be completed by the middle of next year.

Reaction to the merger in Germany was mostly positive, because of the expected benefits to investors. "The investor will have several advantages from the merger, because there will be greater liquidity on the market and a higher turnover," says Franz-Josef Leven, economist at the German Equity Institute in Frankfurt. "I think transactions will become cheaper because the costs will sink."

London-based financial analyst Jonty Bloom told the British Broadcasting Corporation the merger was "a massive step on the way to creating a single European stock market."

Other European exchanges were "bound to join in," he said.

Many factors paved the way for iX. The introduction last year of single European currency, the euro, made transactions simpler. And just like in the US, investment in funds geared towards retirement have soared in popularity among individual Europeans. And from the financial institutions side, there was pressure to create a rival to Wall Street, which outpaced European bourses.

Even Nasdaq, the tech-stock laden US Index, is making a foray into Europe. Last November they announced an Internet-based European network called Nasdaq-Europe. And ahead of the announced merger, it became clear that iX would have close links with the American high-tech Nasdaq exchange.

Earlier it was expected that Nasdaq would open its own European operation, but now it will "cooperate with iX" within Europe.

For Britain, a controversial aspect of the deal is that it will bring closer the day when all shares are quoted in euros. The London exchange still uses the pound sterling.

Nasdaq chief executive Frank Zarb yesterday described the deal as the first step towards a global market place.

British and German blue chip stocks will be traded in London, while trade in growth stocks and futures will be in Frankfurt.

The London-Frankfurt marriage has taken 18 months to develop. The two exchanges last year (1999) announced plans for an alliance, and invited six other European exchanges could join in. But the eight-way deal failed to materialize. Instead, earlier this year the Paris, Amsterdam and Brussels exchanges announced an alliance of their own, called Euronext.

Pressure now seems likely to mount on them to create links with iX.

Yesterday Werner Seifert, chief executive of Deutsche Boerse, and a likely contender to be head of iX, stressed the "open" nature of the agreement, and announced that a memorandum of understanding had been signed with Milan and Madrid.

The merger will require approval from 75 percent of London stock exchange members, but London business analyst Dan Roberts says the deal is likely to be "rubber stamped" by most of the members.

The deal may face greater problems from the European Commission in Brussels, executive arm of the 15-nation European Union.

Analyst Paul Armstrong says Nasdaq's hook-up with iX could attract criticism from EC regulators who could see it as reducing competition in the stock exchange industry.

In recent times Nasdaq has been increasing its global presence taking its technical expertise to stock exchanges such as Tokyo and Montreal.

A spokesperson for Mario Monti, the European Commissioner for Competition, said yesterday it was "impossible to tell" at this stage whether the deal might be seen as anti-competitive.

But Mr. Leven, the German economist, sees no disadvantages for investors, since both British and German markets are highly and fairly regulated.

* Lucian Kim contributed to this story from Berlin.

(c) Copyright 2000. The Christian Science Publishing Society

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