The trading game goes GlobaL

When an offshoot of the Nasdaq stock market opened in Tokyo last month, Frank Zarb likened the event to planting a flag on the moon.

The chairman of the National Association of Securities Dealers (NASD) in the United States used that bit of hyperbole to mark the latest step in a fast-moving trend: the fading of national boundaries in the trading of corporate stock.

The world is rapidly moving toward a 24-hour, seven-days-a-week electronic market open to investors in much of the world.

"This is about empowering investors globally ... about financial democratization," says John Hilly, chairman of Nasdaq International in New York.

In the vision of Mr. Hilly and others working for a global market, investors will trade freely and easily in stocks of companies based in many nations. They will place their orders by phone, fax, or over the Internet with a home or office computer or a digital television. They might even use hand-held electronic tools - perhaps a cell phone - buying and selling stock as they go about their daily affairs.

"This is a period of unbelievable change" in the stock-market business, says Hilly.

The cross-border activity, it is assumed, will bring more liquidity to the trading of specific stocks, possibly meaning better prices on volume deals and lower execution costs.

"That is the hope," says William Freund, a finance professor at Pace University, New York.

Whether the spread of stock trading in developing nations will worsen an existing severe gap between the poor and the rich techno-elite remains to be seen.

Often, when analysts speak of globalization, they refer to the rapid growth around the world of multinational corporations and financial institutions, moving jobs, factories, and money. They should also think securities.

"Many companies have a real global business," notes Georges Ugeux, executive vice president for international affairs at the New York Stock Exchange. "They want to see their stock traded globally around the clock."

For a multinational firm, globalization of securities markets could let it raise capital anywhere in the world at lower cost to finance new plants and other investments. This should raise living standards.

Though there are at least 56 stock exchanges in the world, only a small proportion of the world's populace currently trades stock. As incomes rise in many nations, that could change.

In this globalization process, the NASD, with its Nasdaq stock-trading affiliate, has long been competing with the New York Stock Exchange (NYSE) for the listing of foreign companies on their markets in New York.

Now the two huge American stock exchanges are both driving to set up alliances around the world capable of trading not only the shares of their listed companies but shares of other companies, domestic or foreign.

Mr. Zarb speaks of the "global, digital stock market" - a market taking advantage of the growing universality and cheap communications arising from the Internet and of the growing number of investors in many nations.

"We want to be able to say to companies anywhere in the world that when you list on Nasdaq, you get the world," says Zarb. "That is where we are headed.... Securities markets cannot be constrained by geographic boundaries."

Important to globalization will be a switch in American markets to a decimal system of pricing securities - a system common to other securities markets - rather than in fractions, such as 1/16th. That change may start in September on a trial basis.

Also facilitating globalization will be a common accounting standard for firms. Investors must rely on accurate books in selecting investments. In some nations, however, the rules aren't up to American standards.

In May, at an annual meeting in Sydney, Australia, stock-market regulators agreed to back a set of global rules produced by the International Accounting Standards Committee.

But agreement on an international accounting standard still has a way to go.

World's markets team up

Facing globalization, stock exchanges are striving to stay competitive. Here are a few moves:

The London Stock Exchange and the Deutsche Brse in Frankfurt, Europe's largest exchanges, announced May 3 an agreement to merge. The 50-50 deal will form an entity called the iX (for International Exchanges).

In addition, iX agreed to set up a joint venture with Nasdaq Europe Ltd., the European subsidiary of America's technology-heavy Nasdaq stock market. The joint venture will specialize in growth stocks, taking over the business of London's techMark and Frankfurt's Neuer Markt.

Nasdaq Europe expects to have 500 corporate listings and conduct more than 80 percent of the trading volume in high-tech stocks in Europe.

The iX will be by far the largest stock exchange in Europe. Investors can consider a longer, but divided, list of stocks. Shares of blue-chip firms will trade in London; shares of high-tech firms in Frankfurt. The merger should be final by July 2001.

Negotiations for iX expansion already have opened with exchanges in Milan and Madrid.

In March, in another indication that investors are increasingly seeing Europe as a single stock market rather than a collection of national fiefs, the exchanges in Paris, Amsterdam, and Brussels announced merger plans. They will name their new market Euronext. It's scheduled to be launched in the fall.

Euronext will have the advantage of a new common currency - the euro - in pricing stock. Since Britain still relies on the pound, iX trades would still require currency exchanges.

At some point, iX and Euronext will have to decide how much to compete with each other, and how much to cooperate.

Merger plans are eased by the fact that Europe's exchanges are no longer physical meeting places for equity traders. Traders do their deals over the phone or via computer. The bourses set rules and operate computer systems that record deals and flash prices around the world.

The New York Stock Exchange announced June 7 that it is in "multilateral discussions" to explore the feasibility of a Global Equity Market (GEM) with the Australian Stock Exchange, Euronext, the Hong Kong Exchanges and Clearing, the Tokyo Stock Exchange, the Toronto Stock Exchange, and exchanges in Mexico City and So Paulo, Brazil.

The Big Board is already trading 100 million or so shares a day of the 410 foreign corporate stocks it lists. The value of these trades could reach $1.3 trillion this year, estimates Mr. Ugeux.

Nasdaq claims to have even more foreign companies listed, mostly high-tech, but the value of trading is less than on the NYSE.

The NYSE is one of the relatively few markets left in the world with most of its trades conducted by a "call auction" on the market floor. Orders of the buyer and seller are matched on the floor, rather than being transacted with competing dealers on electronic screens or on the phone. (But many Big Board trades are matched electronically at floor-set prices.)

Coordination and competition

In May, the Securities and Exchange Commission in Washington cleared the NYSE to scrap Rule 390 restricting member firms from trading Big Board stocks in competing markets.

So when GEM is in place, stocks listed on any of the cooperating exchanges could be traded at any time on any exchange through an electronic telecommunications system.

"The little guy is a definite winner here," Ugeux maintains.

He cautions that GEM will take time to create. "This is the beginning of a long journey," he says. Possibly next year, though, the exchanges in North and South America might be ready to deal cooperatively.

The "biggest challenge," Ugeux says, is harmonizing trading rules and procedures that are now set on a national basis.

Nasdaq International is moving rapidly to get its global network in place. Its strategy involves setting up joint ventures with firms that offer shares, and with stock exchanges that transact the orders. In Japan, for example, Nasdaq's partners include Softbank, the nation's leading Internet investor, and the Osaka Stock Exchange. In Europe, Rupert Murdoch's venture-capital firm is involved.

Hilly has other projects under way. Some eight Nasdaq stocks are trading on the Hong Kong Stock Exchange, with "further discussions" under way. He hopes this will lead eventually to a deal with China itself.

The province of Quebec is considering legislation to allow Nasdaq to set up terminals in a sales office in Montreal. In effect, the US market would extend into that province.

The Big Board's GEM and Nasdaq International will compete keenly for the world's stock-trading business.

Robert Schwartz, a finance professor at Baruch College's Zicklin School of Finance in Manhattan, hopes that remains so. "Competition is needed," he says.

(c) Copyright 2000. The Christian Science Publishing Society