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Evolution of European Financial Markets: From Fragmentation to Integration

This overview examines the transformation of Europe's financial markets from fragmented national systems to a more cohesive pan-European market. Key innovations and developments include the rise of electronic trading systems, key mergers like NYSE Euronext, and the formation of EASDAQ. We analyze challenges in creating unified trading frameworks, the importance of clearing and settlement systems, and the roles of major exchanges in fostering cross-border trading capabilities, highlighting the ongoing shift towards integrated financial services in Europe.

yuri-thompson
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Evolution of European Financial Markets: From Fragmentation to Integration

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  1. MIS 3090:IT for Financial Services Global Markets

  2. Outline • Europe’s financial markets • Development of a pan-European market • OM ~ Swedish firm at the vanguard of IT innovation • Nordic and Swiss Exchanges (innovations) • EASDAQ (later became NASDAQ Europe) • Settlement • Conclusion

  3. European Markets • Economic Monetary Union ~ quasi-fixed exchange rates (1979) • Fragmented markets – a matter of national pride • Expensive way to raise capital • Resort to bank borrowing, private equity placing • Slow development of an equity culture (26 equity markets) • State owned companies sold off: British Airways, BP, BT • 1999: NASDAQ sought to launch a pan-European equity mkt. • 24-hour continuous trading (linked with U.S. and Japanese markets) • Tradepoint, Jiway (U.K.-based electronic markets: ECNs) ceased ops. • Neuer Market: electronic market operated by Deutsche Boerse • Traditional markets reacting: London, Frankfurt, Paris

  4. Pan-European Markets click to connect • 1999: London, Frankfurt, Paris, Amsterdam, Brussels, Madrid, Milan and Zurich announce plans for a unified equity market • Common rules / regulations, share systems, common trading hours • This would operate as a “virtual market” by linking all systems • Plan collapsed due to lack of agreement on a common system (Xetra) • Paris, Amsterdam and Brussels decide to merge into Euro-next • Paris: blue-chip firms (BNP: banking; Heineken: beer; Peugeot: cars) • Amsterdam: derivatives, futures, options • Brussels: small and medium size companies • Common trading systems based on NSC (used at Paris Bourse) • Merged with Portuguese market, bought London (LIFFE) • Approx 1,333 listed companies (at end of 2004) • Merged with NYSE in 6-2006 – to be called NYSE Euronext

  5. OMX (Swedish-based) • Own / operate exchanges (for profit), provide IT solutions • Expertise in marketplace, clearing and settlement systems • OM created Stockholm Automated Exchange (SAX) • Order-driven electronic trading system (SAXESS) • Multicasting: transactions sent to all workstations • SAXESS system (see description in this article) • OM Technology solutions • Failed to take over LSE in 2006

  6. Nordic Exchange • Virtual market formed by Nordic (Denmark, Iceland, Finland Sweden, Norway) and Baltic (Estonia, Latvia) exchanges • Includes all OMX exchanges • Market trades in equities, bonds and derivatives • Not part of the Euro zone but can trade in Euros • 916 listed companies at the end of 2004 • Knight Trading (NASDAQ’s largest market maker) • Opening a pan-European market with 19 brokers • There is little to stop other market makers or exchanges from opening in Europe – barriers to entry are high but not insurmountable

  7. Europe’s NASDAQ (EASDAQ) • Formed in 1996 – closed 2003 • Run on NASDAQ-like principles and systems • Aims • Remove problems associated with cross-border trading • Provide dual trading mechanism with NASDAQ (trans Atlantic) • Access to capital for bio-tech, info-tech and growth industries • Regulated: Belgium Commission for Banking & Finance • SEC seal of approval • TRAX system matches bids and offers in real time • Settlement information sent to Intersettle (paperless settlement system operated by a series of Swiss banks – based in Zurich) • Direct link means settlement is on a T+3 basis

  8. European Trading System(ETS interface)

  9. Switzerland ~ Financial Hub • 40% of global cross-border asset management for private clients takes place here • Seventh largest stock market (SWX) • Global leader in electronic trading and settlement • 1996: launched electronic trading system (stocks, bonds, derivatives) • Efficient clearing and settlement system • 2001: SWX and Tradepoint launch Virt-x • Pan-European blue chip electronic market • 1998: formed Eurex with Deutsche Boerse • Subsumed German Futures and Options Exchange • World’s largest derivative exchange (options/futures) • 2002: merging with MATIF and MONEP (France’s derivative markets)

  10. VIRT- X (the cross-border exchange) click here to view today’s trades • Provides direct, real-time access to trading in the constituents of all the major pan-European blue chip indices, facilitating sector and index trading • AEX, CAC40, DAX30, DJ EuroStoxx 50, DJ Stoxx 50, FTSE Eurotop 100, FTSE 100, MIB30 and SMI • Trading model encompasses a continuous electronic public limit order book with opening, intra-day and closing single price auctions and full anonymity; can support liquidity providers and off book and block trading requirements • A single clearing and settlement model supporting STP from trade to settlement; uses SWX trading platform • Supervised by the Financial Services Authority in UK click to connect

  11. EUREX click me • Trades derivatives on Euro and US-based equities/indices • Blue chip German, Swiss, Finnish, European and global indexes including Dow Jones (EURO) STOXX 50 and DAX, the benchmark index of Deutsche Börse • Also offers market sector index derivatives based on the Dow Jones STOXX 600 and Dow Jones EURO STOXX Indexes. • Futures and options on sectors such as banking & energy • Alliance with Chicago Board of Trade (CBOT) • Operated by Deutsche Börse and SWX Swiss Exchange • Trading participants connect to EUREX via a private communications network • 700 locations worldwide are connected to EUREX at present

  12. EUREX US Eurex web site

  13. Settlement Systems (T+?) • SEC wants to move from T+3 to T+1 • Reduce market, credit, operational, and systematic risk • Bank of Japan: deployed Real Time Gross Settlement (RTGS) system for bond trading • Offers intra-day settlement (more like T+1) • Singapore and Hong Kong moving to T+1 • U.S.:Systems implications (process is more important) • Exception resolution (late cycle intervention) • Build bridges to settlement and banking systems • You cannot talk about T+1 unless you have STP • Active involvement by Securities Industry Assoc. (SIA) • Omgeo (A Company Involved in STP Technology)

  14. Conclusion • European markets – not yet fully integrated • Euro-next (stocks, bonds and derivatives) • EASDAQ no longer in existence • Nordic and Baltic exchanges (NOREX) • Virt-x (equivalent of ECN) • Eurex (derivatives only) • Traditional physical markets still exist (LSE) • Desire exists for a single integrated electronic market • Barriers: political, economic issues (technology less a problem) • 26 equity markets: single Euro zone market will happen but then Sterling (UK) has opted out for the moment (Denmark, Sweden also) • Move towards STP: harmonize regulations (single order book) • Settlement day: intra-day maybe but why not stay with T+1?

  15. For Next Class… • Read • Online articles on Sarbanes-Oxley listed on the class website • Turn in answers to Shenzhen Exchange case questions

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