Imagine the following scenario. Bill Gates spends a small portion of his fantastic wealth on buying a global telephone company such as Cable & Wireless or ITT. Then he scours the stock exchanges of the world to put together a management team and launches the Windows World Stock Exchange.
Fanciful? Probably, but there is no doubt that the electronic revolution is sweeping away a lot of the certainties of exchanges around the world, and encouraging new alliances. Seen from London the most important of these is that between Frankfurt and London, but in Germany the view is a little different. The discussions with London are just one of a series of talks that Frankfurt is holding across Europe. Some of these have already borne fruit, others are at an advanced stage of negotiation.
Whether it is because the German exchange is run along corporate lines, rather than as a mutual, or whether it is simply more dynamic, there is no doubt that the development of Frankfurt as the financial core of Europe is being achieved via a series of well- thought-out business plans. The bottom line is not being harmed either, as last month’s announcement of profits tripling to DM60.9m (e30m) shows.
One of the keys to this success is undoubtably the rapid development of electronic systems and their perpetual upgrading. This makes an attractive bait for other exchanges seeking to increase liquidity, but anxious about the costs involved in developing their existing systems.
The best example of this strategy is Eurex, the world’s first merged derivatives market.This combination of the Deutsche Terminbörse (DTB) and Swiss futures exchange Soffex came into being last September, and in January overtook the Chicago Board of Trade to become the largest derivatives exchange in the world.
Participants have access to 11 products that have been traded by the two exchanges to date via a trading system with an integrated clearing house. This has also helped the market to second place in world clearing rankings. Over 350 members from 14 countries are trading a liquid international line of products; most are trading on Eurex from locations outside the German and Swiss borders.
Jorg Fischer, president of the Eurex board of directors, emphasises the exceptional position of Eurex. “A joint trading and clearing platform allows synergies to be achieved that will advance Eurex’s development. The creation of new markets through cooperation with established partners is a clear Eurex vision,” he says, alluding to defined business strategies in Frankfurt. “Realising a system standard for the back end, network and front end is also a declared objective.”
Eurex CEO Jorg Franke takes up the theme, pointing out that Eurex is not the end of the process, but rather the beginning. “Exchanges have to come closer together in the interests of their customers,” he says, adding that this was the only way to provide simple and cost-effective access to a broad line of products. Franke regards the next step in the process as being the proposed cross-membership agreement with the French derivatives exchange. “This alliance will lead the derivatives market into a new dimension, giving us an edge over other exchanges, especially in market integration,” he said last year. Unfortunately, for once, the best-laid plans have gone slightly awry, and the deal has yet to be signed, although negotiations continue. Meanwhile, other partners are being sought. The most significant development to date has been the agreements between Frankfurt and Vienna. Last year Wiener Börse took several measures aimed at making Vienna more attractive as a financial centre. The highlight was the merging of the cash and futures markets, which paved the way for the biggest reform in the 228-year history of the exchange.
Even though the ATX put in a less-than-satisfying performance in 1998 the cash market posted turnover of ASch441.35bn (e32bn), 35.9% up on the previous year and more than double the 1994 figure.
Such improvements are not overlooked across the border in Germany, and negotiations began last year on a number of joint projects between Frankfurt and Vienna. In January this year two accords were signed, one relating to the cash market and the second involving the creation of an eastern European exchange.
The first cooperation contract involves the technical linkage of Vienna’s cash market to German trading system Xetra. Vienna obviously hopes this will reduce transaction costs, open up new distribution channels and draw the attention of international investors to the Austrian financial marketplace.
When trading through the Xetra system is launched at the end of this year, Wiener Börse will be taking advantage of the trading system developed by Deutsche Börse. Xetra operates as a trading platform for cash markets, on which Wiener Börse will organise its own separate market. Importantly, the recent tender for specialists for the cash and derivatives markets on Wiener Börse was a success. Ten specialists assumed responsibility for 44 stocks (20 ATX stocks, two AGM stocks and 22 specialist stocks) on April 1.
At the same time, it will become possible for market participants on Wiener Börse to access all stocks listed on Deutsche Börse, and vice versa. With this step, Wiener Börse will reduce operating costs for the trading platform, while Deutsche Börse will increase Xetra’s capacity utilisation. The hope is that the liquidity of both markets, and thus their attractiveness to participants, will be enhanced. The clearing and settlement of Austrian stocks will continue to be carried out through the systems operated by the Österreichische Kontrollbank (ÖKB).
The 80 Austrian stock exchange members will be joined by 280 – of which 38 are remote members – from Deutsche Börse. Once the Xetra system is linked up to Vienna, Wiener Börse also expects to gain a number of new remote members, in particular from London. On the derivatives segment of the exchange, ÖTOB, Wiener Börse has 10 remote members, ranking it second worldwide after Germany.
It is informative to see how a smaller bourse such as Vienna understands this alliance, compared with the view from Frankfurt. Nevertheless, it is an opportunity to improve liquidity at a fraction of the cost of a local upgrade.
Negotiations between the two bourses for the creation of a new stock exchange for central and eastern Europe are also at an advanced stage. This is probably the most complex project yet attempted by Frankfurt, and one which is creating interest and concern in almost equal measure across the region.
The initial accords were signed back in January. As a first step, both partners will set up an interim company, incorporated in Austria with an initial capitalisation of ASch70m. Joint managing director Erich Obersteiner, a member of the executive board of Wiener Börse, believes that given the expertise and technology already in place in the two cities initial costs will be kept to a minimum. “At the moment we are working on the pre-requirements for the licensing of the new exchange, but this is a complex project, and we would not expect to begin trading until the second quarter of 2000,” he says.
The initial tasks of the new company will be to prepare all technical, organisational and legal aspects required for the establishment and operation of the new exchange. The other joint managing director will be Michael Radtke, head of the central and eastern Europe department at Deutsche Börse.
“The new exchange will set new standards regarding the quality and the efficiency of trading in central and east European stocks. The goal is to bundle liquidity in these stocks, to make trading more transparent and to guarantee a more efficient settlement,” says Obersteiner. However, he concedes the back-office system for the new exchange is complicated, and that at the moment the plan is for clearing to involve both ÖKB and Frankfurt, whilst the market participants will trade through the Xetra system, guaranteeing transparency and modern surveillance methods.
The advantages of the new exchange for the joint stockholders is obvious, but it is not viewed with universal enthusiasm by the bourses in eastern Europe. But, claims Obersteiner, “The new exchange will attract new investors to these emerging markets to the benefit of local exchanges as well as the new Vienna platform.”
However, although it has been suggested that the new company will be opened up to potential new partners in the east, no concrete formula for such collaboration has been devised. “This is one of our main concerns,” says Maria Dunayoljyi, CEO of the Budapest Stock Exchange. Little consultation has taken place with the exchanges most likely to be affected, and the fear is that if the new company is successful, Frankfurt and Vienna will have no reason to involve other partners, to the detriment of exchanges such as Budapest, Prague and Warsaw.
Most analysts agree, however, that some kind of consolidation must occur, as a result of increased competition and technological developments. In the case of the latter, the vision of the future of world financial markets is not to be found in the Microsoft complex in Seattle, or even London or New York, but in the Börseplatz, Frankfurt.