FREE ESSAY ON MODERN CHANGES IN INTERNATIONAL EQUITY MARKETS

MODERN CHANGES IN INTERNATIONAL EQUITY MARKETS

Few things, you might think, are as enduring as a national stock exchange. From pillared
entrance to pulsating floor, they display an institutional solidarity that can surely
defy forces for change. And yet most of the world's bourses are now in turmoil, as they
scrabble to be seen making alliances or mergers, to fend off electronic competitors, or
simply to survive. Even New York, the biggest of the lot, is worried: while London, the
biggest in Europe, seems to lurch from one misstep to another. (The Economist, 17th June
2000). These missteps have come about from a number of structural changes that have, and
are still occurring within national, and global economic environments. A major change is
with mergers of many equity and derivative markets, Switzerland 1993, Germany 1994,
Netherlands, Finland, France and Austria in 1997. (Bank Of England, 1999). This and other
changes such as cross member ship agreements and new parallel links between exchanges,
have, and still are creating and manipulating the international markets. The essay will
then explain why these changes have occurred, looking in depth at technology advances,
technology and scale of economies, technology and competition, cross border investment,
globalisation and new role taken by finical intermediaries, providing specific examples
of these changes seen with current examples. The essay will conclude with a brief summary
of what the larger markets are doing to combat this changes. 
There have been two major structural changes in markets over the past decades. The first
of which is the mergers between equity and derivative exchanges within countries and
secondly the new types of links, created by technological advances between exchanges.
Firstly mergers between equity and derivative markets like the aforementioned Swiss,
German, French, Netherlands, Finnish and Austrian markets. It also should be noted other
links now exist, or soon will, like the Hong Kong Stock Exchange and the Hong Kong
Futures Exchange, and between the Australian Stock Exchange and the Sydney Futures
Exchange. Also there are new platforms being formed, especially within Europe, which
provide a parallel link between exchanges that list similar products. This is seen with
Sweden's OM/OMLx and Norway's Oslo Stock exchange developed a shared trading-platform for
equity derivative products in Feb 1997, and EUROEX was formed in September 1998, a common
trading-platform for German DTB and Swiss SOFFEX. (Bank Of England, 1999). Exchanges such
as Brussels, Luxemburg and Amsterdam stock exchanges, all have cross-membership
agreements, where under these agreements exchange members have access to products from
each of the other exchanges respectively. The Europe's biggest exchange, the London Stock
Exchange (LSE), and the German Deutsche Borse have recently announced a merger in a
number of steps are able to electronically access both trading-platforms. (The Economist,
2000) There is also a tie between the New York Stock Exchange (NYSE) and LSE. The tie is
not in a traditional sense, but Clementi (2001) has shown that the UK and the US both
have large Cross-border investment, with the UK holding $110billion or 8% of UK GDP in us
markets. Clementi (2001) suggests that these unofficial ties, make the UK dependant on
the US economy, an therefore making it vulnerably to any economic downturn, as seen at
the moment with the speculate US recession. (Bank Of England, 2001:131). The third major
change that has been seen is that of exchange ownership is being separated from the
members. This has been done in Amsterdam, Stockholm, Milan and Australia, to name just a
few. Yet the worlds largest stock exchanges are all still owned by it's members, and the
largest of these, the NYSE, is still run in the traditional floor trading style, while
most other world markets are completely automated. There are many pro's and con's of a
floor trading system, but with nearly every market, and all newly established markets
being fully automated, there is becoming less and less support for the traditional
exchange floors. 
Technological advances have enabled many if not all parts of the trading process to be
completely automated. In 1996, the Australian Treasurer announced an inquiry into the
Australian finical system. This report is the Wallis report, it was able to conclude,
among many other things that "Technology development and innovation continues to
facilitate easy access to the full range of financial products (which) will continue to
stimulate growth in new and more sophisticated financial products, and will enable
non-traditional providers of such products to access the financial system. Technology
will continue to provide more efficient and cost-effective information and product
delivery systems." (Viney, 2000:pp64). This efficient and cost-effective information
delivery is now nearly universal in use, with the LSE in 1986, enabled trading with
telephone quotes, then moved to an electronic and largely dematerliased share-settlement
in CREST in 1996, and to the electronic order book SETS for its largest 100 plus stocks
in 1997. The Australian Stock Exchange (ASX) introduced SEATS in 1987, which was a
supplement for floor trading, which was abolished between 1987 to 1990. In 1989 FAST was
introduced, and in 1994 CHESS was put in place as the ASX clearing house Many other
international links have been in placed by the ASX, like the alliance with NASDAQ (1999)
and the Perpetual Registrars (2000), which have all been put in place to try to keep the
market efficient and competitive as possible. These automations have 'surprisingly
missed' (National Journal, 2000) the NYSE, the worlds biggest stock exchange. "America's
supremacy in capital markets is threatened by systems which are not burned by some of our
traditions and practices…if they don't reinvent themselves (the exchange) with what
technology has brought, they run a severe risk of being out paced by markets in other
parts of the world." (National Journal, 2000). Arthur Levitt, chairman of Securities and
Exchange Commission, was interviewed on this topic, where he commented that "…there
is a significant risk that if existing markets do not adapt, do not change…a
substantial outflow of market share to other markets, whether they be electronic, whether
they be markets, in other parts of the world, (will happen). (National Journal, 2000). 
With this new technology that exists to increase the speed and efficiency of trading, it
allows exchanges to increase in size and to benefit from potential scale economies. The
new technology is able to increase the access to markets that were previously
unattainable (compared to floor trading), as it greatly increases ability of access for
firms to participate and reduces any need for geographical proximity to an exchange. The
internet has created the largest impact upon the exchange market, as unlike the
telephone, information can be constantly updated, can simultaneously offer information on
bids and offers, which allows the buyers and sellers to make instantaneous transactions.
(Viney, 2000). With a market that is able to have such a wealth of information available
to any prospective investor, that can also provide instantaneous information of previous
offers and bids, therefore increasing the liquidity of any markets that are able to do
this successfully. Within the United States, Internet broking is estimated to account for
about one Quarter of all retail stock trades. (Bank of England May 1999). This Internet
trade, on the most part, is done at a rate less than a brokerage fee (decreasing the need
for the large firms), many of who own seats at the prospective exchanges. (Applied
Economics, 2000). Economies of scale can also be gained from pooling exchange overheads,
such as marketing, in house technology and so on. These have gained a lot of support in
linking of exchanges that were otherwise not significant. As in the proposed European
central market, with more members joining, it lessens the overhead costs, yet also
creates more trading opportunities, thus increasing the liquidity of those particular
markets. (Bank of England 1999 & The Economist, 2000) 
As the links and mergers of markets increases through different technological avenues,
the competition between national and international markets also increases. Exchanges are
able to offer remote trading platforms, as seen in Manchester, which is a regional
exchange of the LSE, and Chicago, which is regional to the NYSE. These regional exchanges
are do conduct a significant level of business with Chicago, Boston and the Pacific
conducting 4.23%, 1.63% and 1.65% of the trades in the NYSE respectively. The importance
of these exchanges is they are able to provide listings for companies that would other
wise not meet the strict criteria of the NYSE and among others permits brokers unable to
gain a seat on the NYSE to trade without going to the NYSE itself. These remote trading
platforms are able to compete for business, which would otherwise be unattainable.
Competition has also increased recently with the growth and development of,
Over-the-Counter (OTC) markets. The NASDAQ is the largest example of an OTC market, which
provides a quote-driven, non-standardised tailored product for the client. The NASDAQ is
known for its massive hold over the technological market with Microsoft, Dell, Intel and
Cisco to name a few of the markets lager conglomerates. The NASDAQ, with less stringent
entry requirements, is able to have more public offerings straight into the market,
something that is not possible in the NYSE, and now as the NASDAQ has plans to link to
the LSE in the future, there may be no need for companies, once they have reached the
NYSE entry requirements, to go to that market place. 
With this increased competition generated by technological growth it has made the
pressure for the larger exchanges to maximise their trading volumes, reduce overhead
costs, and therefore achieve economies of scale. (Bank Of England, 1999). For markets to
keep these economies of scale, they must continually update their technologies, hence
increasing their overall market scope. The mergers and links that have taken place, using
these aforementioned technologies are able to reduce costs for the markets, increase
their own bargaining power and strengthen their cross-border competitiveness, thus making
an option to merge markets or link national or international markets very inciting to the
smaller markets. Many of these smaller European markets have already, and will continue
to increase their use of this currency in their markets. "(With) the arrival of the
Euro…the notion of running separate national stock exchange seems increasingly
pointless" (The Economist, 2000). The cross-border investment will increase at an
unparalleled level, within Europe, as the Euro will be able to off set any negative
exchange movements. This cross-border investment will become even more prevalent with the
merger proposed with the LSE, German-Borse and NASDAQ, which will be called NASDAQ-iX.
(The Economist, 2000). This proposed new linked market would link these markets, and
trade in a similar fashion as the current NASDAQ does, with its quote driven system. 
All these factors have been influenced by the globalisation of many financial
intermediaries. Globalisation is "the process whereby finical markets are interconnected,
interdependent and integrated." (Vinney, 2000:pp27). The global consolidations of the
major users and, in some cases owners of markets infrastructure, have a very big
influence on the market structure. Through the aforementioned technologies, they have
been able to provide services such as in-house trading or custody services to their
clients, which a decade ago they could not. (Bank of England 1999). They are able to
offer low cost trading and settlement mechanisms alternatives that detract from the major
markets members. With these new technologies in hand, large intermediates are able to
offer cross-border services that a national service would be unable to provide. In recent
years, governments have with their policies, and implementation of enquiries (Campbell
1981 and Wallis 1997), have strongly encouraged globalisation. Governments, especially
from economically smaller nations, are looking toward globalisation to strengthen their
own economy. With international investment made easier with new mergers and links between
small markets, as previously mentioned. 
The missteps that have occurred in recent times have been a result of a number of
structural changes that have, and still are occurring within national and international
economic markets. This essay was able to discuss two of the major structural changes that
have occurred in the markets in recent years, being the merger of markets and new links
between markets. Examples were provided of mergers that have taken place, and are
expected to happen in the future. Evidence was provided of formal recognised links
between markets, and links or associations between markets in the future were also
provided. A more informal link between the US markets and the LSE was shown, and how this
informal link could hinder the LSE if a US downturn happened. The essay then described in
detail the reasons for these changes, which included; technological advances, technology
and scale economies, technology and competition, cross border investment and
globalisation of financial intermediaries. Specific examples were provided of the effect
of technology in the Australian Exchange Market, as well as other markets world wide.
These issues that have been discussed by the essay show that the markets of the world, be
national or international, are dynamic and changing. With technology ever increasing,
markets will continue these trends, and ones that may not yet be seen, and markets that
wish not to, or can not adapt, will suffer. 
Bibliography
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