Nasdaq fills European slot
When Nasdaq Europe was able to make a dual announcement on investors and a new trading system recently, two important hurdles to the future success of the company were cleared at a stroke.
It was back in March that Nasdaq announced that it was taking a 58% stake in Easdaq, which would later be diluted to 51% with the issue of 10.43% to strategic investors. In addition, the company announced it also intended to raise e20m through a subordinated debt issue. The news that eight major financial institutions from across Europe had agreed to invest in the new European stock exchange was backed by Knight Trading Group’s decision to continue as a significant investor. Further news on more investors is expected soon.
Perhaps even more significant was the arrival of the new trading system on stream. Maggie Kelly at Nasdaq says: “One of the reasons we initially bought Easdaq was the new automated trading system, which we looked at as providing a trading system in Europe asap, rather than having to re-invent the wheel ourselves. This enabled us to enter the market that much quicker. The major banks coming on board and putting their money where their mouth is as strategic investors are an endorsement of the whole strategy.”
The European trading system (ETS) offers similar functions to the current Nasdaq Stock Market, adapted to the regional needs of the European market. The system will have market maker quotes capable of execution, a broker-to-broker electronic negotiation facility and facilities for members to report off-market transactions. The trading system will be further enhanced in the fourth quarter of 2001, when a fully integrated hybrid market model will be offered, combining market maker quotes into a voluntary central limit order book.
Unsurprisingly, Nasdaq Europe says it plans to reduce the cost of trading and clearance and settlement on the market, making the company one of the most cost-effective markets in the world on which to trade. There is little doubt, however, that Nasdaq sees the move as giving it a chance to steal a march on other European stock markets as consolidation and merger continues across the continent. With the company’s stated long-term aim of establishing partnerships around the world to develop a global exchange platform, the acquisition of Easdaq was fundamental. Nasdaq clearly envisions the creation of a pan-European hub. Despite the global implications, however, the new company is a European organisation with a presence in both Brussels and London. It will benefit from a European passport and registration and regulation of the market will not change, with registration and regulation in Brussels.
This European element is evident, not merely in the name of the new entity. Kelly confirms that Nasdaq is sensitive to the cultural and legal differences of Europe. “Nasdaq Europe is very much a European organisation. As with Nasdaq Japan, we have common structures to each market while retaining regional commercial characteristics. Nasdaq Japan demonstrates that we can operate successfully in a different regulatory and competitive environment in a manner that is highly sensitive to local custom and practices.”
So can Nasdaq Europe achieve its ambitious aims? There is certainly confidence within the company and among investors. Nasdaq Europe chief operating officer Jim Weber notes: “This trading system has been specifically built to meet the needs, expectations and aspirations of every market participant. I am fully confident that this will drive forward our strategy of expanding European order flow in US stocks, building on European cross-border trading and creating the European IPO market of choice.”
To date the change from Easdaq to Nasdaq Europe has been seamless, with few problems for market participants for the existing product range. A further test will come later this year when the product range is expanded. Although the currency of choice is the euro for both listing and trading, the new trading system and the clearance and settlement solutions will support multi-currency transactions.
So far as clearance and settlement are concerned, Nasdaq Europe will work with market participants to establish a user controlled European central counterparty facilities managed by the Depository Trust and Clearing Corporation (DTCC). The central counterparty will accept multiple market and off-market feeds, provide trade guarantees, offer an optional settlement netting facility, settle cross-border trades as simply as domestic trades by allowing participants to use the settlement provider which is best fitted to the commercial needs of the security or customer.
Kelly recognises that a central counterparty may not always be beneficial to all participants, especially one that is not able to take full advantage of settlement netting. Because of this, participation in the central counterparty will not be mandatory, and there will be a facility for participants to bypass the central counterparty and settle trades on a bilateral basis.
So does this deal consolidate Nasdaq’s aspirations for a 24/7 market? The company speculated on such a market in November 1999, and this transaction brings the reality one step closer. “The announcement moves us closer to achieving our strategic vision of an international Nasdaq. This transaction begins to put into place the third leg of our global trading platform – Nasdaq Europe, Nasdaq US and Nasdaq Japan,” says Nasdaq chairman Frank Zarb. Although he does not mention talks with other European exchanges, Zarb has clearly not ruled out other deals. His recent comments in New York on flotation are significant. “Offering shares to the public is the logical natural next step in the evolution of Nasdaq. When the time is right we will do it.” A flotation in 2002 would make Nasdaq the first large US securities market to offer its shares on the open market.
Analysts see the flotation as a route to raising a war chest for more acquisitions. A related move in mid-June was the latest stage of the separation of the Nasdaq Stock Exchange from its parent company the NASD, and its transformation into a truly independent organisation. The Securities and Exchange Commission’s (SEC’s) summary letter of The Nasdaq Stock Market, Inc’s application for exchange status was published in June in the Federal Register. Nasdaq’s application for exchange status was submitted to the SEC last November and the SEC is providing for a 45-day public comment period, which will enable interested parties to submit their views.
Richard Ketchum, president of Nasdaq, says that it is a change in the legal status, rather than in the way that Nasdaq operates. Significantly, he adds: “Once the change is approved Nasdaq will be able to access the capital markets to fund technology improvements and to continue building the world’s first global equity marketplace. We thank the SEC for getting this application out for comment and will work with all interested parties to complete as expeditiously and seamlessly as possible, the process of becoming designated as an exchange.”
Kelly confirms that as part of the process of improving the business Nasdaq continues to maintain regular dialogue with “ a number of other European exchanges”.