GLOBAL – Further consolidation of the world’s stock exchanges in a trend to a single global equity market is being predicted by Avinash Persaud, global head of research at State Street Global Advisors, but he warns that regulators must exercise their influence correctly.

Deregulation, improved information flows, and the pursuit for liquidity by investors have driven the trend towards consolidation of exchanges, and although not predicting an imminent emergence of a global stock exchange, the possibility is there, believes Persaud, and it has its advantages and disadvantages.

One consequence of the emergence of a global stock exchange is that the standards of the dominant market would probably become the norm. As accounting standards and corporate governance vary according to historical, cultural and legal background, some companies and economies would be seriously at a disadvantage. “If [those countries in the European_Union] delay in the progress towards a more harmonised European financial market, the likelihood is that the single global financial markets is based in the US around standards that may be alien to…European business.”

For those countries lacking in sufficient corporate governance standards, however, a single market may prove beneficial. Persaud suggests that it could free some successful companies from adverse country factors.

A further concern arising from a global financial market would be the effect on companies too small, and therefore unable to afford the costs of listing globally, leaving them with an illiquid exchange.

What Persaud is keen to point out is that bigger is not necessarily better when it comes to liquidity. Rather, he feels the key lies in ‘diversity.’ One would expect a larger market to be more diverse, but this is not always the case. Pernaud suggests regulation should change to promote diversity, and rather than installing common standards across different types of institutions and across risks, it would be preferable, in terms of liquidity, to do the exact opposite. Pernaud attributes the underperformance of the UK equity market to pension and insurance companies being forced to sell as a result of breached regulatory ratios.

In conclusion, says Pernaud: “Regulators probably have more influence… than they appreciate or currently exercise. They can boost liquidity of markets by promoting more diversity. They can also play a role in nurturing or even establishing investor-driven exchanges to make sure that the public benefits of an efficient national exchange are not list in the pursuit of the owners’ profit.”

Avinash Pernaud was speaking at a lecture at Gresham College, London where he is an honorary professor.

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