It seems odd. The
New York Stock Exchanges
are traveling the world seeking alliances, while at the same time struggling with technology demands and aggressive competitors at home.
But both domestic stock markets now find it essential to make themselves into organizations on which the sun doesn't set. Their haste is born of the very real penetration of automated trading, which when applied to overseas markets creates a platform for 24-hour trading across time zones and national borders.
Electronic trading systems already have displayed their power in the U.S., pushing beyond normal trading hours, for instance. Now, as some of these systems line up for full-exchange status, the established powers of the Nasdaq and the NYSE are trying to ensure they, rather than the upstarts, become the U.S. link to the growing international capital markets.
Nasdaq, so far, has been more aggressive than the NYSE, setting up operations or links with exchanges in Osaka, Japan; Quebec, Canada; Hong Kong and Europe. In Europe, it will be part of the planned
exchange. The iX will trade technology stocks from Frankfurt's
and blue-chips from the
London Stock Exchange
wrote about the iX earlier this month.)
The NYSE has, in the past, been content to let foreign listings come to New York, but a
Wall Street Journal
story Wednesday says it also is discussing several links to exchanges overseas. (A Big Board spokesman confirmed the talks.)
Out With the Big Leather Chairs
"Nasdaq and other exchanges have realized they are businesses, not just clubs," says Ian Domowitz, a
finance professor and electronic trading expert. "Nasdaq isn't necessarily neglecting business at home, it's changing the business model."
Both the Nasdaq and NYSE have been victims of domestic insurgency. The Big Board's largest members pushed it to rescind Rule 390, which will let other exchanges trade NYSE-listed stocks. The Nasdaq has seen electronic communications networks morph from simple automated trading systems to being on the brink of becoming full-blown exchanges, while taking volume. The two exchanges also are readying themselves to shift to trading stocks in decimals instead of fractions, something regulators are pushing but the Nasdaq isn't ready for.
Given all this, some observers worry about the two markets' overseas overtures, especially in the case of the stretched Nasdaq.
"I don't see anything wrong with making overtures as long as it's not the Nasdaq's first priority," says Lee Korins, head of the
Security Traders Association
, an industry trade group. "The priority should be to build the most efficient market here in the U.S. because once it becomes a public company, a lot of people are going to take shots at it."
But the two exchanges also believe they have little choice but to expand overseas. "We believe the world is shifting its focus from national markets to global markets," says Alfred Berkeley, the Nasdaq Stock Market's president. "We're playing for the next decade."
"In the Nasdaq's case, the bigger you can make the network, the more liquidity you'll have," adds Penn State's Domowitz. "Nasdaq needs the ability to compete along two dimensions: liquidity and cost."
The idea is this: Any exchange that wants to succeed will have to ensure access to international investors and give its U.S. members access to international listings. That's the liquidity angle: making sure when a Duetsche Boerse member firm wants to trade
, it can do so in Intel's most liquid market -- the Nasdaq, according to Berkeley.
Despite the Nasdaq's success overseas, it's had problems at home. It rankled Congress when it successfully petitioned the
Securities and Exchange Commission
roll back its deadline for switching trading to decimals from fractions. A Nasdaq spokesman says its decimal testing worked, but the software to make it happen ate up 98% of its computer capacity. Now it's trying to restructure the software by 2001's first quarter.
Meanwhile, though, ECNs have told regulators and
fill that void and begin trading in decimals immediately, which puts more pressure on the Nasdaq.
Berkeley points out that the Nasdaq's international moves and its domestic technology operations are run separately and that there were "no restraints" on the resources available to the decimalization team.
In Canada, Nasdaq has forged a pact with the government of Quebec to establish
, but it may still strike a deal with the
Toronto Stock Exchange
, another automated exchange. The Quebec arrangement won't dissuade the Toronto exchange from further discussions with Nasdaq, Barbara Stymiest, that exchange's president, said in a press release last week. But the Toronto exchange also is flirting with the NYSE.
The risk-reward situation in Europe is slightly more complicated, with exchanges across the continent seeking to join the new iX. The exchanges there are bigger, the automated trading systems faster and the volume heavier than in markets like Mexico or Canada.
Despite that, the London Stock Exchange and Deutsche Boerse probably decided it was better to link up on their own terms, rather than have less appealing terms dictated to them later.
Either way, the U.S. exchanges are taking steps to make sure they're players in whatever shakes out. "I don't think we are fully cognizant of the changes direct access to the market will bring or their impact on the business," says Korins. "What we're seeing here is not a change for a couple of years, it's a change of major proportion."
German correspondent Marc Young and freelancer Derek Moscato contributed to this story.