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July 31, 2002

The Coming Global Stock Market: The world's stock exchanges are playing the mating game. Is the new

By Joe Kolman

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The world's trading superpowers are working quietly behind the scenes on a long-held dream: A stock market that spans the globe.

It would work like this: Imagine, if you will, a stock market where trading in American shares begins at 3:00 a.m. New York time, just as Europeans are opening their morning newspapers. Or, if you will, a market in which U.S. investors can buy Volkswagen as easily as General Motors.

That may happen sooner than expected. For the most part, the world's stock exchanges have remained local affairs, sticking to their own national or regional knitting. But the next few months may produce the world's first super-exchange, industry sources tell Traders Magazine.

Rumors were swirling recently that the London Stock Exchange, Europe's largest equity market, and Nasdaq, the second-largest U.S. stock market, were about to link up. Fueling the gossip were reports that Nasdaq and the LSE had been discussing regulatory hurdles and consulting with the U.S. Securities and Exchange Commission.

Then, on July 21, it was publicly disclosed that Richard Furse, the husband of LSE Chief Executive Clara Furse, had bought 100,000 shares in the LSE. For many exchange watchers, that meant only one thing: The deal was off for now. That's because, under U.K. securities regulations, directors, or their spouses, are prohibited from buying stock in their company if it is in merger talks.

If negotiations had been previously proceeding, Furse may have possessed price-sensitive information. He would have thus been prohibited from buying shares in the exchange. But with no deals on the table, he could snap up shares at prices considerably below the exchange's IPO last year.

Dominate Europe

The London Stock Exchange is still the world's hottest exchange property. It may not be very long before an international bidding war breaks out over who controls the exchange. LSE officials admit that they've also been talking informally to the two European exchange giants, Germany's Deutsche Boerse and Euronext, a French-run group that includes the Paris, Amsterdam, Brussels, and Lisbon exchanges.

The LSE, like all exchanges, has been losing volume to internal order-matching within large brokerage firms. A merger of two or more large exchanges would boost liquidity across the board. "The biggest benefit would be putting all the liquidity in one system," said Gordon Macklin, who was president of Nasdaq from 1970 to 1987, and currently sits on various corporate boards. "There's a fair amount of duplicate expense that could be saved," he added. "If you pooled everyone's technology, you might get a better product than six different groups trying to invent the wheel themselves."

Broker dealers operating in the European markets have long dreamed of a more consolidated exchange landscape. Despite the adoption of a single currency by European Union members (with the notable exception of the U.K.), Europe remains a patchwork of some 15 national bourses, and perhaps 10 electronic platforms. There are more than two dozen clearing and settlement systems.

"One of the challenges of running a trading desk [in Europe]," said Andrew Shortland, senior managing director at Bear Stearns' international trading desk in London, "is to make sure that everyone is proficient in executing through various mediums."