By Edmund L. Andrews
New York Times
July 8, 1998


In the clearest sign yet that national boundaries are
disappearing within European financial markets, the stock exchanges of
London and Frankfurt announced a broad alliance Tuesday aimed at creating a
pan-European trading system.

The alliance between Europe's two biggest stock exchanges comes as financial
institutions across the continent are preparing for the debut of the euro as
a new European currency in January.

It also highlights the growing pressure on London, which wants to preserve
its role as Europe's financial center even though Britain will remain
outside the new currency union for the time being.

The move Tuesday came just two weeks after Frankfurt's exchange, the
Deutsche Borse, disclosed that it was discussing potential joint ventures
with Nasdaq, the electronic over-the-counter trading system in the United
States. Executives are now looking at the possibility of three-way
discussions that would include Nasdaq.

To be sure, European stock exchanges have talked about alliances many times
before, without much to show for their efforts. The Frankfurt, Zurich and
Paris exchanges announced plans for an alliance last fall, but they have yet
to make much practical progress. French and Swiss officials apparently knew
nothing about the talks between London and Frankfurt.

Under the latest agreement, the London Stock Exchange and the Deutsche Borse
plan to develop a joint electronic trading system for blue-chip British and
German stocks. But the ultimate goal is to bring in other European stock
exchanges and create a unified electronic market for major stocks across
Europe.

The move is "the first step along the road to a single European market,"
Jack Kemp-Welch, chairman of the London Stock Exchange, said at a news
conference in London.

Though European stock prices have soared in the last year, the markets
remain fragmented and inefficient. Each European country has at least one
exchange, and few companies are traded in more than one market. Trading
volumes tend to be lower, because activity is scattered among multiple
exchanges that run on different rules, different languages and different
technologies.

Now, with 11 countries adopting the euro as a common currency on Jan. 1,
European financial institutions are rushing toward consolidation. Under the
rules of the European Monetary Union, securities traded within the euro zone
will be listed in euros rather than national currencies on the first day of
business next year.

"At the end of the day, euro-land will have one or at best two major
financial centers," said Frank Beelitz, managing director of Lehman
Brothers' office in Frankfurt.

Until Tuesday, London's security exchanges had given every impression of
trying to compete on their own rather than team up with other European
exchanges. Though Britain is not adopting the euro for the moment,
London-based financial institutions have prepared for euro-based trading and
hope to benefit from a general trend toward consolidation.

The London and Frankfurt stock exchanges have until now viewed each other as
blood rivals, with each hoping to assume the leading role in a unified
European marketplace. At the moment, the London Stock Exchange lists almost
three times the number of companies listed in Frankfurt. But the Frankfurt
exchange generates more trading volume, because it is home to the heavily
traded stocks of corporate giants like Daimler-Benz and Siemens.
The Frankfurt exchange has made several big advances in the last year or so.
Its relatively young futures market has overtaken the London futures
exchange in several key areas. It has also had great success with a new
electronic trading system, called XTRA, which now accounts for about
two-thirds of the exchange's total trading. That stands in contrast to the
London exchange's new electronic trading system, called SETS, which
functions reasonably well but has yet to generate heavy trading volumes from
institutional traders.

In announcing their alliance, the two exchanges said they planned to create
a company that would eventually establish a single electronic trading system
for major stocks across Europe. The first step, which exchange executives
say will take about 12 months, is to harmonize rules and create common
procedures for buying stocks.

"The goal of the alliance is to deliver a low-cost, efficient and accessible
equity market infrastructure," said Werner Seifert, chief executive of the
German stock exchange. Though the management and technical details have yet
to be decided -- and could turn into big obstacles -- Seifert said the goal
was to create the "nucleus of a single European stock market which will
ultimately be based on a common electronic trading platform."