Technically Speaking: Stock exchanges must move fast before the world leaves us behind

Friday 12th May 2000

NYSE Composite

Nasdaq

Australian Stock Exchange

The Stock Exchange has finally admitted it has been looking at merger proposals for 18 months.

Considering how vitriolic the exchange has been about its critics and those who have proposed its merger or takeover, and how the exchange demands full disclosure from its listed companies, it might have been expected that it would have practised what it preaches over its own destiny and kept the market fully informed along the way, releasing position papers.

What the Stock Exchange intends to do to ensure the survival and evolution of its role in facilitating capital formation goes beyond the vested interests of its old boys' network and is a matter of national interest. There are wide social, economic and political ramifications arising from the potential range of means available to raise equity capital.

Although the Stock Exchange has been innovative in areas such as trading technology, it may have missed its mark as a potential leader in deregulated international capital markets mainly because it has tended to be more focused on its members' localised exigencies rather than the global needs of its true market, the customers of its members.

NZSE members may have been short-changed in the process because a huge opportunity may have been missed, for example, in the exchange not licensing off its screen-based trading system to other sharemarkets around the world. It could have been one of today's hottest IT firms.

Loss of old economy staples Nufarm and Lion Nathan and the IPO of Telemedia to the Australian Stock Exchange, and of Brierley Investments to Singapore, plus the impending disappearance of most of the Fletcher Challenge listings and, perhaps, Carter Holt Harvey, has done significant cumulative damage to the NZSE's standing. The change of government and resulting left-wing ideological opposition to sale and listing of major state assets such as Contact Energy mean there are few if any substitutes outstanding in large unlisted corporates.

The NZSE is by its own admission too small to copycat the Australian exchange and convert itself into a self-listed company. The ASX has had a roller coaster ride as a listing (chart 1) but at least has the flexibility and motivation to ensure it is truly integrated into global investment markets.

A short and sweet way of tidying up the NZSE's position would be for the ASX to make a scrip offer to NZSE members. The New Zealand Futures & Options Exchange (NZFOE) has been owned by the Sydney Futures and Options Exchange (SFOE) for some years now, so there is a precedent.

The ASX itself is involved in a deal with the US-based National Association of Securities Dealers (NASD) stock exchange, of eponymous Nasdaq index fame (chart 2).

The tie-in with the Nasdaq is part of a global push by the second-largest US bourse to integrate sharemarkets into what it has branded "iX" - international exchanges. Included in its scheme are the US and Canada, the UK and Germany in Europe, and Japan and Hong Kong in Asia.

Intriguingly, the Nasdaq's expansion partners are new-economy IT-oriented firms such as Australia's News Corp via ePartners, France's Vivendi and Japan's Softbank. Reuters is a competing player, indicating it is dataflow and not shopkeeping that dominates bourses' fortunes.

A major consequence of the Asian economic crisis is that in future international capital will not just be thrown at "hot" countries but rather that investment rationing via risk-adjusted portfolio approaches will apply that necessitate high-quality information flows about rival economies in open competition for foreign capital. The dot.bomb phenomenon started to apply to countries before it hit internet listings.

Australia would logically want a piece of the Nasdaq's globalisation action so it is not left behind in the dust as an also-ran economy, and so too by extension might New Zealand. One likely result would be that the top 100 Nasdaq listings would be listed on our own combined Australasian sharemarket. There would be a reverse flow of New Zealand listings to the Nasdaq as well, such as Telecom and Advantage Group have mooted.

The Nasdaq is an upstart sharemarket dating back to 1971 and is associated with venture capital listings and high technology stocks. Its bigger American rival, the New York Stock Exchange, was founded in 1792, publishes venerable indices such as the NYSE composite (chart 3), and remains the world's biggest stock market. The NYSE will not stay that way if the Nasdaq's iX drive succeeds in what will be an international regulatory minefield.

The NYSE intends to list as a company in late 2001 to make itself a more nimble competitor for equities trading business but that could be too late to head off the Nasdaq's thrust for worldwide sharemarket hegemony. Vicious rivalry between the NYSE and the Nasdaq has had the former pointedly commenting by implication on the lower listing standards and greater dot.bomb potential of the latter.

Breathing down the necks of both is the Reuters subsidiary Instinet, which is the largest US-based off-exchange agency brokerage network and a player already in the UK and Germany.

Instinet has welcomed the Nasdaq initiative of a 50% iX-branded joint venture with the London and Frankfurt stock exchanges that would absorb the German Neuer Market and the British techMark into a single transatlantic bourse run on the Nasdaq's trading systems. Ominously for the Australasian sharemarkets should they fall behind the momentum, Instinet said US sharemarkets had to modernise to keep up with technological progress. If the Americans cannot afford to be complacent when they dominate world equity markets, a strong message about survival of the fittest is sent to the Australian and New Zealand stock exchanges.

There may need to be some swift political action transtasman to deal with sharemarket merger hang-ups such as compatible market regulation, a possible common currency and mutual recognition of share-dividend tax credits.

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