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July 31, 2002

The New World Order

By John A. Byrne

It may seem like dangerous and foolish talk as stock markets stumble and slide. But some see a

rare opportunity for a high-profile merger of the world's major exchanges. Sure, the London Stock Exchange and Nasdaq have, once again, walked away from the table in recent days. Yet, tomorrow, it could be the turn of the New York Stock Exchange and London for fresh merger talks. It could be a merger of the three big exchanges, or an alliance of Germany's Deutsche Boerse and the French run Euronext. The point is that globalization, an obvious force in today's world of advanced technology and cross-border trading, is pushing exchanges into alliances. The serious players, conscious of the "first mover" advantage, may take the bear market as a temporary interruption in a longterm but potentially lucrative mission.

This month's Cover Story by Joe Kolman, a new contributing editor based in New York, started out as recent Nasdaq and London merger talks were in full swing and then, suddenly, were scuppered. Kolman, a veteran financial writer with excellent sources in Europe, was undeterred. He turned instead to the full range of alliance possibilities in the context of regulation, trading and technology.

If there is a defining moment in the global stock market scene - a scene with plenty of fanfare but equal measures of failure - it came in 1986. That's when the Big Bang transformed the London market. It abolished fixed commissions in the U.K - about ten years after a similar U.S. move. But perhaps more important, it allowed foreign ownership in U.K. investment banks. Floor-based trading in London came to an end. From that day, London sought to modernize and globalize. (Earlier, the London Stock Exchange launched SEAQ International, the Stock Exchange Automated Quotation, for trading pan-European stocks.) The rest, however, is a sometimes difficult history. The London exchange ran into spectacular technological fiascoes and massive budget overruns. London still dominates as a major international stock trading center but it sometimes seems like a boat out at sea, adrift in the fog. Nasdaq, meanwhile, moved gingerly into Europe. In March 2001, it acquired Europe's Easdaq stock market. That acquisition, however, has not yet translated into robust trading success. Knight Securities, which dominated Nasdaq market making during the bull market years, has been unable to replicate that record in London.

The bear is also a big factor in our Special Report by assistant managing editor Gregory Bresiger. The talk on Wall Street is about cutbacks. His story is about job creation. It is easy to be discouraged. But many displaced traders are finding professional work at a variety of houses, including well-managed dealing desks, direct access firms and hedge funds. Indeed, a study of recent money flows by Birinyi Associates estimates that hedge funds now account for as many as one out of four trades. The backdrop for both stories this month is change and opportunity in an uncertain world. The smart people and the smart money will succeed in this environment.

John A. Byrne

Editor