Technically Speaking: Twenty-four hour global trading dream moves giant step closer

Friday 30th June 2000

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The Economist has carried a recent series of articles (June 17) on the dash under way to create a 24-hour global stock exchange.

This dream has moved closer to reality over this year and is being driven competitively from the US by bitter arch-rivals - the old-school-tie New York Stock Exchange (NYSE), led by chief executive Richard Grasso, and the white-shoed National Association of Security Dealers (Nasdaq), headed by chairman Frank Zarb.

Back in the pre-1987 crash days there was heady talk of linking up securities markets in successive time zones, with New Zealand to become a latter-day Switzerland as the first country in the chain to see in the new day. Alas, it was not to be and never will be now.

Since then technology, particularly the internet, has moved on dramatically to make geographical location less relevant. The internet age has left this country without much premium on its former time zone advantage where securities trading is concerned.

The NYSE is exploring a global sharemarket involving itself and allied Intermarket Trading System exchanges in the US such as the Pacific Exchange, joined up with France, Belgium and the Netherlands in Europe, and Japan in Asia.

The Nasdaq is pursuing the same goal through allying itself with a proposed merger of Europe's London and Frankfurt stock exchanges under the iX brand, plus Japan, Hong Kong and Canada.

The New Zealand Stock Exchange's putative merger partner, the Australian Stock Exchange (ASX), is probing hopefully around the Nasdaq consortium, where it would rank as a flea on the dog's tail. The NZSE would be a flea on the flea.

Much is at stake. For sharemarkets, sheer bulk of listed capitalisation can push an exchange up the queue in the Morgan Stanley capital index (MSCI), the global weighted sharemarket capitalisation index colloquially known as the "finger of god" because it is used by fund managers worldwide to set their asset allocations across countries.

A low sharemarket ranking in the MSCI can mean foreign capital starvation. No MSCI ranking means the stock market equivalent of near-death experience.

Muscling up the MSCI's slippery rankings means a sharemarket can attract more fund manager money and thereby demonstrate greater ability to raise capital, enabling it to recruit more listings and repeat the process in a virtuous circle.

The ASX is anxious to beef up its MSCI weighting from 1.2% to stay relevant internationally as a place to raise and trade equity capital. Otherwise it is doomed to become the same sort of investment backwater the NZSE represents. Big is beautiful where contemporary sharemarkets are concerned. Brute market capitalisation is a leading advantage over competitors.

The biggest of them all is the NYSE, which has over $US12 trillion of capital listed, compared with the Nasdaq at a bit over $US5 trillion, Tokyo with $US4 trillion, London with about $US3 trillion and Frankfurt with roughly $US1.5 trillion.

It is evident why the Nasdaq is running hot on grabbing London, Frankfurt and Tokyo, because resulting collective total capitalisation at approaching $US14 trillion would knock the NYSE off its perch.

However, traded volume is also important because of the central role market liquidity plays in ensuring investors get their best price realised on transactions.

The highest-average daily traded volumes are found on the Nasdaq at about 1750 million, followed by London at some 1400 million, the NYSE at a bit over 1000 million, Tokyo at 550 million and Frankfurt at about 200 million. Summing up the traded volumes of the Nasdaq's favoured partners would amount to an average daily rate of around 3900 million shares.

The Economist has identified two influences pressuring stock exchanges to shed their national limitations and go global. The first is the electronic technology revolution spearheaded by the internet.

Brokers and exchanges are being forced to cut costs and create economies of scale by internet trading and at the same time face stiff competition from upstart internet-based exchanges collectively called electronic communication networks (ECNs) such as Reuters' Instinet, and according to Mr Grasso, soon from e-commerce firms like eBay and Yahoo!

The internet revolution is impinging directly on the evolution of tomorrow's sharemarkets.

Already in Australia, online brokers are offering straight-through processing, a time-saving facility where customers go directly to the Stock Exchange floor for trading, bypassing the ASX's manual datapunching operators, and soon wireless-enabled protocol (Wap) cellphones will make this efficiency mobile.

The other trend is for corporations to go global in capital raising and equity trading. The lead has been taken by European corporations since abolition of currency borders between the 11 Eurozone members.

A strong argument for New Zealand to skip over the proposed Anzac common currency and go straight to the leviathan US dollar as our national currency is there would be vastly improved international access to investment in our equity capital which a transtasman minnow dollar simply could not provide.

The internet revolution has forced stock exchanges to reappraise where their true value lies. The conclusion being drawn is that stockmarkets are primarily databases.

The ASX now sees itself as a significant generator of market signals through its trading statistics. The NYSE's Mr Grasso has stated, "We are in the data and media business."

The NYSE makes $US130 million a year from selling its data, such as for the indices illustrated, but that data is in turn repackaged and resold by other firms for about $US20 billion a year.

Mr Grasso wants a piece of that larger income by regaining control over NYSE data, to which end the exchange plans to withdraw from the Consolidated Tape Association, a mutual organisation run by all regulated American exchanges.

The NYSE plans to list itself and $US20 billion in revenues would come in handy to promote its merit as a cash cow. Stock exchanges now have to work on maximising the market value of their information.

Occasionally there is talk of the NYSE and the Nasdaq merging, which could set off shivers of apprehension about the sheer power such an equities-trading colossus would wield, but then the ECNs and e-commerce rivals would no doubt go into competitive overdrive.

Certainly an anti-trust action in the US sharemarket area would dwarf the Microsoft case in implications, but then the US government might see advantage in having the world's equity market firmly under US control, with no rival stockmarkets conceivably big enough, even if joined together, to resist for some time to come.

It all makes the NZSE's travails in seeking a rescuer seem somewhat comic and trivial.

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