The Amsterdam Exchange has had an interesting year, combining the negative impact of the collapse with what was hoped would be the more beneficial experience of being a part of the Euronext exchange, along with Paris and Brussels. Whilst the overall performance of the AEX has been in line with other European exchanges, with liquidity pretty solid until the last quarter, there remains some anxiety about the likely impact of the tripartite link-up.
Looking at the last quarter to end of March, turnover in equities slipped by 0.7% in the face of sharp price fluctuation. Alongside this, however, the exchange points out that total turnover on the markets was up slightly over 6% at E575bn. The flip side was the performance of the bond market during the month of March up almost a third on the same month last year. The result was that new bond issues rose sharply with almost E6.5bn admitted to the listing. This followed on from an increase in turnover in bonds of 23.4% during the first two months of this year. During the same period equity options were the best performers on the derivatives market with contracts up one fifth year-on-year, with 11m options and futures traded. Sharply fluctuating prices meant the upbeat mood on the derivatives market continued to the end of the first quarter.
Pim Bertens at Binck Brokers in Amsterdam believes that the sell-off during the first quarter of the year was not a sign of panic. “The index bottomed at 512, 15% lower than the start of the year, and so we probably lived through the worst quarter of the past seven years. The option volume was increasing during this freefall, and whilst stock activity was decreasing, and this just confirms that Amsterdam is a very mature and educated market. This activity profile indicates that the private investor knows what options are and also how to use them. We did not see too many people getting hurt, and the lack of activity in stocks was simply because of a lack of buyers.”
AEX indicated in April that equity in-flow was at a four-year low, confirming Bertens’ view that buyers were reluctant to return to stocks. “There is a lot of money on the sidelines, and I believe we will soon see a market up-turn. It has been pretty solid in the face of the disappointment over interest rate cuts, and so long as we get no bad news we don’t need too much good news to see a recovery.”
The exchange remains up-beat about the year to date, and last year’s performance, and also about the impact of the Euronext agreement. Liquidity has been solid over the year to December 2000, and although the last quarter has seen a reduction it remains “sufficient”. Among market-makers and smaller brokers however, there is an air of concern that things could go awry.
Prime among their concerns is the question of organisational reform. “Euronext creates a good platform for the smaller firms,” said one stock jobber who declined to be named. “There remain, however a lot of measures that have to be taken, and it is all very hectic at the moment. This leads to uncertainty and for the markets that is never a good thing. On the positive side we anticipate costs will come down, and we trust that there will be more cross-border clearing, and hopefully added liquidity. The membership structure is also favourable to us, and so we are quite positive.”
There is also concern over the abolition of the role of the specialist, or stock jobber. This will have a major impact on how a particular group of shares are traded. The French model will be introduced in Amsterdam and this will affect small firms in both Amsterdam and Belgium, but most particularly the Dutch whose
trading model differs substantially. The trading platform will also be
the French model, although this should not prove too much of a problem for brokers.
Bertens still believes that the merger will be positive for Amsterdam, especially the options market which is much bigger than those in Paris or Brussels. “The negatives are still the clearing problems and the IT link-ups. There must be no delay in the September deadline, as we are very much a part of the euro project. Any postponement now would probably mean a launch summer 2002, which is an unacceptable delay.”
Jon Abbink, Head of Research at Van der Moolen & Co in Amsterdam, says that Dutch brokers may be underestimating the impact of the Euronext merger. “Amsterdam represents around 30% of the merged company, and consequently the French call the shots, at least on the equity side. So on the cash side the French system will be the dominant system. For Paris and Brussels it is no great change, but for Amsterdam it is a huge step. It means that the specialist system, which we operate here now, will go. At the moment every stock is managed by a specialist, that will change and be replaced by a
pure auditorial system without
the management of the books by
the specialist.”
He points out that in the new system the more liquid stocks will be priced continually, and the less liquid will be traded in auctions two times a day. “This will affect not only companies like us and the smaller brokers but
also the issuing companies who do not like the auction system, and who would like to be continually priced,” says Abbink.
Making a comparison with the French premier market which boasts around 1,300 stocks, about half of them are traded in auctions. “We hope this will not be the case in
The Netherlands,” says Abbink, “Although we suspect that between 50 and 100 will be traded in this way, which is not very good for the attention which these stocks will get from investors. This is a major debating point in Amsterdam at the moment, but there are others.”
Prime among these is the likely impact on the options market in Amsterdam, which is the last remaining physical open house market; with Paris and Brussels both having electronic markets. “Amsterdam had flirted with the idea of an electronic market, but has shied away from such a change. Within the context of Euronext they are still deciding how they can provide an electronic market environment without losing the retail investor on the market. This is important since the options market is unique in that some 60% of the trading is retail driven,” says Abbink. “The fear is that if you change the physical environment for an electronic market the quality of the price quotation on the market comes down. We saw that when Liffe in
London went electronic. So what is going to happen to the Amsterdam options exchange is unclear and this is very worrying.”
Clearly, Amsterdam sees itself as tbe odd one out in the new merger. It was the only exchange with the specialist system and the only one with a physical options market. There is however another difference according to Abbink, and that is the greater liquidity of the AEX. “There are good reasons for this, and they are based on the fact that the trading system was much better than the model which we are getting from the Euronext structure. The worry is that not issuing company or trading party likes change, and this could affect liquidity.”
Another area of worry among smaller brokers is the future of the “best practise” equity deals done off the exchange directly between traders. “The reporting obligation to the central market is very important for the integrity of the pricing of stocks, as these deals are done with reference to the benchmark on the central market. In New York, for example, as little as 10% of trades will be done off the market, and so will have little impact on the price benchmark. If you have a situation where far more are traded off-market the reporting obligation becomes more crucial. Best practise means that traders must report these deals within a matter of minutes, so that all participants may see what is happening,” Abbink points out. “If we look at the French market this obligation is not there. There is a requirement to report to the regulator, but then there is a question mark over whether or not the regulator gives this information to the market. So far the exchange has been unable to confirm that there will be a satisfactory conclusion to talks within the Euronext alliance.”
There is an element of national pride at stake here, as Amsterdam is the older exchange, and members believe that they boast the better rules, but there is little indication that these will be incorporated into the new model. A year on from the London launch of Euronext, and with the September deadline looming, Amsterdam, at least, believes there are a number of questions yet to be answered.