| BUSINESSWEEK ONLINE : AUGUST 16, 1999 ISSUE | ||||||||
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| INTERNATIONAL BUSINESS
Bourse Busters Europe's big traders want a unified system. Who'll provide it? The explosion of Internet trading and other new investment vehicles has rocked America's most powerful financial institutions, including the New York Stock Exchange and Nasdaq. Now, Europe is beginning to feel the tremors. On July 30, the London Stock Exchange said it would scrap its nearly two-centuries-old, member-owned structure. It will become a profit-making, shareholder-owned company that could eventually go public. The LSE wants more flexibility to maneuver than its current arrangement, with 294 owners, allows. ''We are facing increasing competition between exchanges, and new systems are coming in to try to take business away,'' says the LSE's chief executive, Gavin Casey. Europe's biggest financial institutions are worried that their traditional turf could be in for an earthquake. Powerful players are pushing for a unified system for trading stocks to cut costs and open the way for more sophisticated products. If the traditional exchanges in London, Frankfurt, and Paris don't provide it, someone else will. Heavyweight investment banks and fund managers are already investing in alternative exchanges and other vehicles. ''People like us are making a number of investments because the end result is not clear,'' says Ronald R. Dewhurst, head of European equities at J.P. Morgan in London. ''But if that prods the stock exchanges into action, that would be good.'' LOWER COSTS. At the same time, U.S. Internet brokerages such as Charles Schwab & Co. (SCH) and E*Trade (EGRP) are setting up shop in Europe. And they are joining local players such as Barclays Stockbrokers in Britain or Commerzbank in Germany in attracting retail investors with cut-rate services. All this is scary for established players, who face big losses in market share if they don't get the new business models right. But it means that investors--both institutional and retail--will likely enjoy the benefits of lower costs and more user-friendly systems. That should help expand trading volumes and promote an equity culture in Europe, which substantially lags behind the U.S. in market capitalization. But to grow fast, Europe needs to straighten out its snarled financial infrastructure. A year ago, the LSE and Deutsche Borse, which runs the Frankfurt exchange, announced a merger that seemed to herald a consolidation of all the European exchanges. Though the exchanges deny their alliance is in trouble, market participants say progress has been slow on finding ways to eliminate costly and cumbersome differences in trading systems, settlements, and regulation. ''They have agreed on opening hours; that is about it,'' says one senior London banker. So while the exchanges talk, the bankers are building alternatives. Several firms, including J.P. Morgan, Morgan Stanley Dean Witter, and Warburg Dillon Read have joined together to rescue Tradepoint, a struggling electronic exchange on the fringes of London's Covent Garden, from near bankruptcy. Tradepoint's largest shareholder, following a $22 million recapitalization, is Instinet Corp., the Reuters subsidiary that is the biggest of the U.S.-based electronic crossing networks that have grabbed such a big share in trading Nasdaq stocks. Founded in 1995 as a pioneering alternative to the LSE, Tradepoint never attracted enough action to make money. But Tradepoint's new owners plan to send enough business its way to make the company profitable. Tradepoint CEO Richard Kilsby says the new owners also plan to use it as a vehicle for introducing to Europe hot new products such as trading in market-baskets of stocks, which have been a big success in the U.S. Some of the same big players also participated in a recent $24 million new funding for Easdaq, a Brussels-based would-be Nasdaq that now lists some 49 high-tech companies. Tradepoint itself has become an owner. Easdaq is building a new electronic system that will allow it to not only trade European tech stocks but Israeli and U.S. listings as well. With Tradepoint specializing in big-cap stocks, these two exchanges could eventually form the core of a new Internet-capable, shareholder-owned, European exchange that might eclipse or even absorb London, Frankfurt, and the others. ''The old established players are going to be swept away by an onslaught of technology players,'' says Clive Pedder, Easdaq's director of marketing. ENOUGH FLOW? The investment banks' clients, too, are becoming more creative in using technology. A group of about 20 mostly London-based fund managers, prime clients of the banks, are putting together a trading system that will cut brokerage costs by matching trades of big blocks of shares amongst themselves. Nigel Foster, a Merrill Lynch Mercury Asset Management executive who will head the new venture, called E-Crossnet, says that participants will be able to trade at a cost of about 0.10% of the transaction's value, down from the current average of about 0.60%. That would cut the cost of a $1 million trade from $6,000 to $1,000. ''This is a good example of how fees that previously went to a middleman can be saved by investors,'' says Peter A. Murray, CEO of Railways Pension Trustee Co., which manages more than $20 billion for British retirees. Some veterans are skeptical. Tradepoint and Easdaq haven't made much of a mark in several years of operation. E-based systems may be cheap to operate, but the big question is whether they will attract the massive flows necessary to achieve efficient pricing. Europe already has a problem of big orders swinging stock prices. ''In trading, the cost is not so much the commission but how much you move the price of the stock,'' says Robert A. Metzler, vice-chairman of Morgan Stanley in London. ''That is why liquidity is so important.'' The key to building liquidity may not be alternative exchanges but new and lower-cost providers to lure in retail investors, who have traditionally been a small part of the European markets. E*Trade, the big U.S. online broker, has just entered the British market, joining Charles Schwab, which is beginning to catch fire a year and a half after launching its online service. Schwab says it is signing up 2,000 clients a week. Such firms offer flat-fee trades for as low as $25, while traditional brokers charge as much as 1.25% per trade. In a recent study, J.P. Morgan predicts that online account holders in Europe will soar from 400,000 at the end of 1998 to almost 2.5 million by the end of next year. But Julian Costley, chief executive of E*Trade U.K., acknowledges that E*Trade and other online brokers have ''a really tough task'' in establishing themselves with European investors. So do all the players in Europe. The situation is messy, and it is far from clear who the winners and losers will be. But there is plenty of opportunity. By Stanley Reed in London _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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