The expiration of the June contract of the 10-year bund marked the end of a year-long plunge in trading on Liffe's floor of contracts tied to the future price of Europe's most widely held bonds. It also sent a chilling message to Europe's 42 other stock, futures and options exchanges, which are now under attack from two powerful forces - advances in electronic trading technology and the advent of a single European currency.
Liffe's share of trading in 10-year bund futures fell from 75 per cent to 10 per cent in just 12 months as investors moved their business from the London pits to a screen-based trading system run by Liffe's arch-rival, the Deutsche Terminboerse (DTB) in Frankfurt. Now Liffe has decided to trade what's left of the bund contract electronically.
"The bund is gone," said Graham Newall, managing director at Bank Austria Creditanstalt Futures Group. "Liffe was very overconfident and really underrated the power of the system the DTB put together." Other exchanges are taking note.
Investors expect the euro, the common currency that 11 countries will adopt in January, to spur big changes at European exchanges. They foresee a single European equity market that will be the second largest in the world after the US.
Once companies throughout most of Europe begin using a common currency, investors will be able to more readily compare the performance of those businesses, whether they're based in Rome, Munich or Brussels. That should lead to a rise in cross-border investment and cause the whole European equity market to grow.
Many exchanges are readying themselves for this era by joining forces. In a bid to offer investors one-stop shopping, the Amsterdam stock exchange merged with the Dutch futures and options exchange in January 1997. The Paris bourse took over the French futures and options exchange last September.
In Scandinavia, the Stockholm and Copenhagen exchanges have adopted a common electronic system that allows investors to trade both Swedish and Danish stocks from either exchange. Exchanges in Brussels, Amsterdam and Luxembourg are also planning to use a common system.
"There's a lot of scope for consolidation," said Steven Chamberlain, a European fund manager at Invesco in London.
Some officials predict that all 43 European exchanges will eventually merge into just six or seven regional bourses, all linked by a common electronic trading system.
"There will be a system of limited alliances, much like the airline industry," said George Moeller, president of the Amsterdam Exchanges, at a conference on Europe's equity markets last week in Luxembourg.
The stakes are high. Jeremy Isaacs, head of European equities at Lehman Brothers in London, predicts the value of stocks traded annually in Europe will surge from $3.5 trillion (pounds 2.2tn) to $6tn by the year 2000. He said much of that increase will come from new investors eager to diversify their portfolios by buying shares of companies in the top stock groups, or indexes, in Europe.
The exchanges that win will be the ones that offer trading in the stocks making up the most popular indexes, investors and exchange officials said. Already, exchanges and financial companies have created more than a dozen pan-European stock indexes, each vying to come up with Europe's version of the Standard & Poor's 500, the most popular US stock index.
The DTB and the Paris Bourse, for example, have teamed up with Dow Jones, which owns the rights to market the Dow Jones Industrial Average in the US. The three partners have developed the Dow Jones Stoxx indexes, two groups that include the largest capitalised stocks in Europe.
Liffe and the Amsterdam Exchanges are offering futures and options trading on the Eurotop indexes, a collection of indexes managed by FTSE International, a UK company that created the benchmark British FT-SE 100 index.
While not everyone agrees on how fast the European equity market will develop, they do agree on one thing - it will be electronic. To thrive in this new order, exchanges will have to be accessible to traders doing business from desktop computers anywhere in the world.
Liffe, which stuck to the "open outcry" model for most of its 16-year history, now plans to introduce its own electronic system by the second quarter of next year. The DTB, hoping to build on its success with the bund contract, has teamed up with futures and options markets in France and Switzerland to form Eurex, a screen-based exchange that allows investors to trade European futures and options.
Just how fast the national exchanges consolidate and a real single equity market develops will depend, in part, on whether the UK eventually drops sterling in favour of the euro, investors said. More than a third of Europe's largest companies by market capitalisation are based in Britain.
An equity market that excludes the UK does not offer a complete picture of corporate Europe, many investors believe.
The London Stock Exchange is betting that investors will continue to include British stocks in their portfolios whether or not the UK adopts the euro. The LSE aims to attract those investors with its electronic trading system, which already has trading of more international stocks than any other exchange in Europe, as well as British stocks.
The progress towards a single European equity market could well be held up by national - or even regional - pride. Spain, for example, still has exchanges in Barcelona, Bilbao and Valencia, even though Madrid, the country's largest bourse, handles 80 per cent of the country's trading volume.
Germany's eight stock exchanges, each influenced by local business leaders and politicians, can't even agree on a common trading system.
"Just as any respectable country considers it has to have a national airline, everyone wants their own stock exchange," said Stanislas Yassukovich, chairman of Easdaq, the Brussels-based exchange for small companies. "If these were commercial businesses owned by shareholders, the shareholders would force a consolidation, but they're not. It's going to be a messy situation."
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