Small stock markets feel the squeeze

Date: 19/02/1998

By Chris Johnstone

ACCORDING to many analysts, the recent disappearance of Europe's oldest stock exchange is a sign of things to come.

Antwerp stock exchange, established in 1531, made its last trade at the end of 1997 before being swallowed up in the new year by its bigger and more active neighbour in Brussels.

Brussels, in turn, is helping to put together a Benelux alliance of exchanges with its Luxembourg and Amsterdam counterparts. Its supporters point to the interesting possibilities created by a marriage of middle-sized exchanges and the wealth of financial instruments and cash locked up in the Grand Duchy.

Small does not seem to be beautiful for Europe's exchanges, with observers predicting the stock market equivalent of chain stores and supermarkets supplanting the corner shop.

It is the onset of the single currency, more than the two-year-old Investment Services Directive (ISD) enabling investment houses to do business easily outside their national borders, which is forcing trading places to take a second look at themselves and weigh up their chances of survival.

Europe's current tally of 33 exchanges could well be trimmed down to about ten as the protection afforded by national currencies disappears and smaller markets are taken over or close down, say analysts. A trader from one of Belgium's biggest banks puts the figure even lower, suggesting that only five or six groupings of exchanges are still likely to be on the scene in a few years' time.

"We will see a consolidation," said a spokesman for one of Europe's biggest exchanges, whose warning was echoed in a recent report by German Christian Democrat MEP Ingo Friedrich which also concluded that not all existing markets would survive.

The smaller exchanges, not surprisingly, take the opposite view, claiming that reports of their imminent death have been greatly exaggerated and insisting that they still have a share in the future, although it might be as part of a wider network or alliance.

"Home markets are the only place where you will find private investors. You would never find a Belgian buying Belgian shares on the Amsterdam market," said Vincent van Dessel, the marketing and listing manager of the Belgian bourse. "We have seen a large number of share introductions in the past years that have made the mistake of underestimating the presence of private investors."

However, the formation of alliances is proceeding at a pace which would appear to contradict any arguments that the small exchanges have a future standing alone.

This process is both being fuelled by fear of the euro and made possible by its forthcoming introduction.

"All three Benelux bourses would have difficulty surviving on their own," said a spokesman for the Amsterdam exchange.

"We are clearly seeing exchanges starting to position themselves for the arrival of the single currency," added a European Commission official.

The first concrete results of preparations for the Benelux alliance should be announced next month.

Shared membership of each of the three exchanges by securities traders and an index of top Benelux blue chips are two of the alliance's objectives.

The Vienna stock exchange is also looking around for ways to assure its future. A sharp reduction in its fees seems a certainty, while an alliance with a bigger exchange or development as a springboard for investment in central and eastern Europe are options. Share volume on the Vienna exchange is on a par with Germany's smallest regional stock markets.

Alliances are not only being formed amongst the small players. Frankfurt and Zurich stock exchanges have combined their trading of derivatives with parallel operations taking place on the Paris exchange.

"We are looking at a common platform for shares as well, but no decisions have been taken," said a spokeswoman for the Frankfurt exchange. She believes a shake-out will be unavoidable as markets prepare for global competition. "We think that it is impossible to have so many exchanges," she concluded.

The London stock exchange, which is the most exposed to sniping from rivals because of its dominant position and short-term self-exclusion from the single currency zone, last week announced plans to allow trading in euro as well as sterling for the most liquid British shares in its Euro top 300 index from January 1999.

The move is aimed to pre-empt poaching by continental exchanges of trading in British shares.

As an established financial centre, London had little to gain from the ISD, as the big securities houses which have taken up the option of remote membership were already based in the city.

The ISD's role is difficult to establish. It played a bit part in killing off the Antwerp exchange, with the extra burdens on management imposed by the directive helping to bring the exchange's precarious existence to an end.

Antwerp's death was predictable, if not pre-announced. Only one company was actively traded during the exchange's last years, the local bank Anhyp, which itself had to be rescued following a crisis. "It was just not viable to continue operating a whole exchange for one share," said one observer.

The wider effects of the directive - trail-blazed as a measure which would boost competition between exchanges, cut the cost of share transactions and remove national barriers by allowing securities houses to take up 'remote membership' of other exchanges once they were cleared to trade on the national market - are difficult to identify.

Remote membership allows a securities house to trade on a local exchange without going through all the red tape involved in winning recognition from the local regulatory authorities.

Two years after its introduction, Commission officials admit that the ISd has not even been fully put into effect in Spain and Luxembourg. But in other countries, it appears to be working well. "There has been quite a good response to remote membership, especially on exchanges such as Stockholm and Frankfurt," said an official.

As yet, however, there is no real competition between national markets for equities trading, according to Belgium's Van Dessel, although he admits that it has become fiercer for derivatives. Only a handful of companies has taken up remote membership of the Brussels bourse.

For Van Dessel, national exchanges continue to be the main focus for trade in local company shares because volume is high and, as a result, the prices for sellers and buyers is better. He believes that is how it has always been and how it will continue to be, adding: "It is a question of culture and language."

Amsterdam, which is considerably bigger than Brussels but still in the second division of European exchanges, has used the ISD to pursue an active policy of encouraging foreign trading houses to take up remote membership, with around 50 firms making use of the option.

With the help of the ISD, Amsterdam reckons it has turned itself round from its former position as a relative backwater by repatriating trade in Dutch shares from rivals such as London over the last two years.

"Apart from really big companies like Royal Dutch Shell, more than 50% of trade in Dutch shares is in Amsterdam," said a spokesman for the exchange, adding that transaction fees fell sharply before the ISD came into effect but have remained little changed since. In spite of this success, Amsterdam still feels vulnerable.

At the end of the day, the market itself will decide whether it and other exchanges have taken the necessary steps to trade for another day.

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