Modern Changes In International Equity Markets Few things, you might think, are as enduring as a national stock exchange. From pillared entrance to pulsating floor, they display an institutional solidarity that can surely defy forces for change. And yet most of the world’s bourses are now in turmoil, as they scrabble to be seen making alliances or mergers, to fend off electronic competitors, or simply to survive. Even New York, the biggest of the lot, is worried: while London, the biggest in Europe, seems to lurch from one misstep to another. (The Economist, 17th June 2000). These missteps have come about from a number of structural changes that have, and are still occurring within national, and global economic environments.
A major change is with mergers of many equity and derivative markets, Switzerland 1993, Germany 1994, Netherlands, Finland, France and Austria in 1997. (Bank Of England, 1999). This and other changes such as cross member ship agreements and new parallel links between exchanges, have, and still are creating and manipulating the international markets. The essay will then explain why these changes have occurred, looking in depth at technology advances, technology and scale of economies, technology and competition, cross border investment, globalisation and new role taken by finical intermediaries, providing specific examples of these changes seen with current examples. The essay will conclude with a brief summary of what the larger markets are doing to combat this changes.
There have been two major structural changes in markets over the past decades. The first of which is the mergers between equity and derivative exchanges within countries and secondly the new types of links, created by technological advances between exchanges. Firstly mergers between equity and derivative markets like the aforementioned Swiss, German, French, Netherlands, Finnish and Austrian markets. It also should be noted other links now exist, or soon will, like the Hong Kong Stock Exchange and the Hong Kong Futures Exchange, and between the Australian Stock Exchange and the Sydney Futures Exchange. Also there are new platforms being formed, especially within Europe, which provide a parallel link between exchanges that list similar products.
This is seen with Sweden’s OM/OMLx and Norway’s Oslo Stock exchange developed a shared trading-platform for equity derivative products in Feb 1997, and EUROEX was formed in September 1998, a common trading-platform for German DTB and Swiss SOFFEX. (Bank Of England, 1999). Exchanges such as Brussels, Luxemburg and Amsterdam stock exchanges, all have cross-membership agreements, where under these agreements exchange members have access to products from each of the other exchanges respectively. The Europe’s biggest exchange, the London Stock Exchange (LSE), and the German Deutsche Borse have recently announced a merger in a number of steps are able to electronically access both trading-platforms. (The Economist, 2000) There is also a tie between the New York Stock Exchange (NYSE) and LSE.
The tie is not in a traditional sense, but Clementi (2001) has shown that the UK and the US both have large Cross-border investment, with the UK holding $110billion or 8% of UK GDP in us markets. Clementi (2001) suggests that these unofficial ties, make the UK dependant on the US economy, an therefore making it vulnerably to any economic downturn, as seen at the moment with the speculate US recession. (Bank Of England, 2001:131). The third major change that has been seen is that of exchange ownership is being separated from the members. This has been done in Amsterdam, Stockholm, Milan and Australia, to name just a few. Yet the worlds largest stock exchanges are all still owned by it’s members, and the largest of these, the NYSE, is still run in the traditional floor trading style, while most other world markets are completely automated.
There are many pro’s and con’s of a floor trading system, but with nearly every market, and all newly established markets being fully automated, there is becoming less and less support for the traditional exchange floors. Technological advances have enabled many if not all parts of the trading process to be completely automated. In 1996, the Australian Treasurer announced an inquiry into the Australian finical system. This report is the Wallis report, it was able to conclude, among many other things that “Technology development and innovation continues to facilitate easy access to the full range of financial products (which) will continue to stimulate growth in new and more sophisticated financial products, and will enable non-traditional providers of such products to access the financial system. Technology will continue to provide more efficient and cost-effective information and product delivery systems.” (Viney, 2000:pp64). This efficient and cost-effective information delivery is now nearly universal in use, with the LSE in 1986, enabled trading with telephone quotes, then moved to an electronic and largely dematerliased share-settlement in CREST in 1996, and to the electronic order book SETS for its largest 100 plus stocks in 1997.
The Australian Stock Exchange (ASX) introduced SEATS in 1987, which was a supplement for floor trading, which was abolished between 1987 to 1990. In 1989 FAST was introduced, and in 1994 CHESS was put in place as the ASX clearing house Many other international links have been in placed by the ASX, like the alliance with NASDAQ (1999) and the Perpetual Registrars (2000), which have all been put in place to try to keep the market efficient and competitive as possible. These automations have ‘surprisingly missed’ (National Journal, 2000) the NYSE, the worlds biggest stock exchange. “America’s supremacy in capital markets is threatened by systems which are not burned by some of our traditions and practices .. if they don’t reinvent themselves (the exchange) with what technology has brought, they run a severe risk of being out paced by markets in other parts of the world.” (National Journal, 2000). Arthur Levitt, chairman of Securities and Exchange Commission, was interviewed on this topic, where he commented that ” ..
there is a significant risk that if existing markets do not adapt, do not change .. a substantial outflow of market share to other markets, whether they be electronic, whether they be markets, in other parts of the world, (will happen). (National Journal, 2000). With this new technology that exists to increase the speed and efficiency of trading, it allows exchanges to increase in size and to benefit from potential scale economies. The new technology is able to increase the access to markets that were previously unattainable (compared to floor trading), as it greatly increases ability of access for firms to participate and reduces any need for geographical proximity to an exchange.
The internet has created the largest impact upon the exchange market, as unlike the telephone, information can b …