"CURRENT STATE AND EXPECTATIONS FOREUROPEAN EQUITY TRADING WITHIN

THE COMMON MARKET "

byGabriel HAWAVVINI*

andMichael SCHILL**

93/07/F1N

* Yamaichi Professor of Finance, at INSEAD, Boulevard de Constance, Fontainebleau77305 Cedex, France.

** Research Associate, at INSEAD, Boulevard de Constance, Fontainebleau 77305Cedex, France.

Printed at INSEADFontainebleau, France

CURRENT STATE AND EXPECTATIONS FOREUROPEAN EQUITY TRADING WITHIN THE

COMMON MARKET

Gabriel Hawawini

Yamaichi Professor of Finance

Michael Schiff

Research Associate

INSEAD Euro-Asia Centre

January 1993

CURRENT STATE AND EXPECTATIONS FOREUROPEAN EQUITY TRADING VVITHIN THE

COMMON MARKET

ABSTRACT

This paper reviews the current state of European stock markets and examines theimpact that a number of recent developments (such as the Eurolist, derivativemarkets, competition among European fmancial centers and the emergence ofnew trading technologies) may have on the future of equity trading within theEuropean Community.

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CURRENT STATE AND EXPECTATIONS FOREUROPEAN EQUITY TRADING WITHIN THE

COMMON MARKET

I. INTRODUCTION

Since the mid-1980s, three discernible factors of change have affected the integration

process of equity markets within the European Community: (1) the world-wide

advances in technology and telecommunication applications in most aspects of the

securities industry, (2) competition among key European financial centres vying for a

role as the European 'link' in the increasingly global issuance and trading of

securities, and (3) vigorous legislative efforts on the part of the European Commission

to create an integrated European financial sector. As Europe enters the post-1992

period, these three factors will continue to be the principal determinants of the nature

of equity trading in Europe's integrated market.

Exchanges across the globe have been dramatically altered by the computerization of

the securities trading industry. Recent technological advances have facilitated such

important trends as the creation of inter-exchange networks for securities pricing and

settlement, the 'dematerialization' of physical paper certificates, and the development

of electronic trading systems which remove the need for one centralized trading

building.

Since the 1986 'Big Bang' in London, stock exchanges in Europe have been jockeying

for leadership of the European securities trading industry. Faced with the emergence

of a world-wide trading market, stock exchanges are increasingly fearful of losing

their position as the dominant vehicle for trading securities within their respective

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countries, or of missing the opportunity to participate as a leading exchange for the

pan-Europe market. Moreover, in France, Germany, and other centres, the

realization that capital markets are becoming the financing vehicle of the future has

resulted in a heavy push to grow a fledgling securities trading market into a world-

class contender. Investments in advanced technology, a proliferation of securities

instruments and markets, and a lowering of trading fees are among the weapons being

used as European stock exchanges compete for dominant positions within the

developing market.

An integrated financial market, as envisaged by the European Commission, is

expected to provide the thread with which the 12 Community nations will weave the

fabric of a single European economy. Among the various opinions, recommendations

and directives issued by the Commission conceming all sub-sectors of the financial

services industry, the 1988 directive (an extension of a 1986 Commission directive)

concerning the liberalization of capital movements, serves as a necessary backdrop for

legislative reforms that are more specific to the securities sub-sector. The

fundamental aim of this 'core directive is to remove exchange controls and allow the

free movement of capital throughout the European Community (EC) without any

discrimination between residents and non-residents. 1 In most respects the specific

directives relevant to the securities industry are patterned after the same basic

principles that affect the banking and insurance sub-sectors: minimum harmonization

of essential standards, mutual recognition in the application of these standards, and

home-country control and supervision of entities operating within other member

states. These principles have been enshrined by the Commission in a set of key

directives (see Appendix), the essence of which is examined briefly in the next

section.

To understand better the impact of these three factors, Section II examines the current

(albeit rapidly evolving) structure and operations of European equity markets, assesses

4

their informational efficiency, and summarizes the European Commission's key

reforms specific to the securities industry. Section III suggests that, despite the

continued diversity of Europe's stock markets, the implementation of technology and

the harmonization of EC regulation are eroding the barriers to equity market

integration. While the effect of these forces will allow greater unity, the persistence

of inter-exchange rivalry for market protection, and the inability of the twelve EC

countries to 'converge' the performance of their economies, will hinder the emergence

of full market unification in the near future.

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IL CURRENT STATE OF EUROPEAN EQUITY MARKETS2

This section examines the range of structures, activities and organizations represented

by the individual equity markets, compares their operational efficiencies and finishes

with an assessment of their informational efficiencies, within the perspective of the

efficient market hypothesis.

2.1. Size and International Activity

The significant differences in market size and activity among individual European

equity markets are summarized in Table 1. The London Stock Exchange (LSE) is

clearly the leading market in terms of both market capitalization and the number of

domestic and foreign stocks listed. LSE's domestic market capitalization,

approximately Ecu 0.7 trillion of year-end 1991, places it third internationally alter

Tokyo (Ecu 2.1 trillion) and New York (Ecu 2.0 trillion). 3 London is followed by the

Federation of German Stock Exchanges and the Paris Bourse (which integrates the

regional French markets), with market capitalizations of Ecu 277 billion and Ecu 259

billion respectively. In so far as the number of foreign stocks listed is a fair indicator

of the level of 'internationalization' of Europe's equity markets, LSE again holds the

leading position with 604 foreign stocks listed. The exchanges of Germany, Belgium,

the Netherlands and Paris create a well-balanced second tier with 239, 234, 234 and

231 foreign listings respectively. In terras of the sheer volume of annual transactions,

London and Germany dominate with 1991 volumes of Ecu 442 billion and Ecu 316

billion, respectively. Germany is able to achieve such impressive trading volume due

to its strong turnover ratio of 1.14 compared with that of London (0.61).4 Lastly,

there is a marked difference in share ownership participation across EC countries. 22

6

percent of adults in the United Kingdom now own shares, compared with only 13

percent of adults in France, and 6 percent in Germany.

2.2. Trading Organisation

Led by the LSE, European equity markets are rapidly moving away from traditional

floor-based transactions toward electronic, screen-based trading systems. Despite the

effective closing-down of the trading floors in some markets, all European markets

mentait' .1 official trading hours (see Table 2). Today, the LSE is essentially an over-

the-counter market similar to New York's National Association of Securities Dealers

and its automated quotation system (NASDAQ). Although the system accommodates

24-hour trading, market makers are only required to display continuous two-way

prices for certain specified securities during official trading hours. Stock trading on

the fully electronic Copenhagen system or the French . CAC (Cotation Assistée en

Continu) system provides similar fully-automated features. Other Continental

exchanges, particularly Milan and Frankfurt, are likewise preparing to computerize

their equity markets fully.

2.3. Price-setting Mechanisms

There are various price-setting mechanisms in the European equity markets, with the

periodic call system (or batch system) as the traditionally dominant mechanism.

Under this system, orders coming in over an interval of time are not transacted

immediately, but are stored and transacted together multilaterally. Batch systems can

function in verbal, written or miction forms.5

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The batch system approach followed by most exchanges is expected increasingly to be

replaced by a continuous market system, similar to that which prevails in London,

with computer-a qq-isted trading and quotations. In a continuous market system, a

transaction occurs whenever two traders' orders cross. Price-setting and transactions

are automatic and occur continuously. Continuous market systems are now also

available in Brussels (CATS), Copenhagen, Frankfurt (IBIS), Lisbon (TRADIS),

Madrid (CATS), Milan (BORSAMAT) and Paris (see Table 2). In particular, the

Milan exchange hopes that through die introduction of BORSAMAT, the large

number of private off-market transactions will be redirected to the stock exchange

where traders can be assured of the most competitive price.

The pricing mechanisms of Europe's stock markets can also be segmented by quote-

driven versus order-driven systems. Pricing in London is determined by dealers

(market makers) who post quotes for which they are willing to buy or sell the shares

listed on the exchange. Trading mires place when die counterparty accepts the quote

provided by the market maker. On the Continental exchanges, pricing is determined

by die market clearing price matching the orders for shares entered into the system.

The order-driven, or 'auction' pricing system can be either continuous or consolidated

into discrete periods of time. Trading was traditionally conducted among members of

the exchange gathered around a 'corbeille', but now price-setting on many exchanges

has moved toward computerized techniques.

Currently, more than one price-setting mechanism may operate in die sanie market.

For instance, in France, an auction form of the batch system is used to determine the

price of most of die stocks that trade in the cash market, whereas a continuous system

is employed for actively-traded, fast-selling stocks.

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2.4. Price-stabilization Techniques

Closely related to price-setting mechanisms is the issue of price-stabilization

techniques, the most frequently employed of which is the imposition of a maximum

dey limit on price changes (see Table 2). In the Paris market, for instance, opening

prices of liquid shares are not allowed to deviate by more than 10 percent from the

previous day's closing price. Moreover, the price after an exchange trading break

may not change by more than 5 percent. The day's closing price may not, therefore,

represent an increase of more than 21.20 percent or a decrease of more than 18.75

percent on the previous day.

Other price-stabilization techniques include trading halts with indicative prices, the

refusai to accept destabilizing orders (both employed in Brussels), stabilizing

speculation by market makers (employed in Amsterdam and Brussels), and the

affirmative obligation stabilization method as employed in the United States (not

currently used by any European stock exchange). 6 Furthermore, it is important to

note that the majority of European exchanges do not employ any administrative

stabilization techniques such as 'circuit breaking' .7

Trading halts with indicative prices are less drastic than maximum price limits since in

the former case stabilizing orders can enable trading to resume after a short break.

Unfortunately, few exchanges use this technique. Stabilizing speculation by market

makers is encouraged in some markets by offering participants a trading advantage

through lower trading costs and/or preferred access to some market information. The

range of stabilization techniques employed indicates the need for harmonization of

standards in this area to enable individual European markets to respond to sharp stock

price movements in a coordinated fashion as economic integration proceeds.

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2.5. Clearing and Seulement Systems

Many European exchanges are making the transition to paperless trading. Both the

Copenhagen Stock Exchange and the Paris Bourse have been completely

'dematerialized'. London's system, the Transfer and Automated Registration of

Uncertified Stock (TAURUS) system, hopes likewise to eliminate the holding of paper

certificates.

Centralized clearing organizations are currently at very diverse levels of development

among EC member countries (see Table 2). The Spanish govemment has provided

for the creation of a centralized securities clearing organization, but the organization

has not yet been created. Securities clearing in Spain is currently done through stock

exchange management companies. The Belgian market also currently operates

without a centralized clearing house for its domestic securities, which must be cleared

directly by the stock exchange.

London's centralized clearing system, TALISMAN, has been operational since 1979.

The system provides payment through a single account with the clearing house for

most members or, when combined with the Institutional Net Seulement (INS) system,

for institutional investors. The introduction of TAURUS will accelerate London's

electronic clearing system by dematerializing share certificates and enabling

participants to be linked electronically. Following testing of the system by the

London Stock Exchange, the City hopes to have TAURUS running by the second half

of 1993.

Improving back-office processing has been a major objective for the Paris Bourse as

well. Through its Société Interprofessionelle pour la Compensation des Valeurs

Mobilières (SICOVAM), paper certificates were first transformed into electronic book

units in 1984. As an important promotional tool for the internationalization of the

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French market, the November 1990 début of RELIT, a fully computerized clearing

and seulement system, was launched with a listing of 11 securities; RELIT is based

on two principles: 1) the simultaneous exchange of securities and cash and 2) a

standard time-frame for trade comparisons and settlement. Settlement using RELIT is

being trimmed from five days to three days, the targeted time for settlement on most

of Europe' s exchanges.

In Germany, the Deutscher Kassenverein (DKV) fulfills the dual role of central

depository and clearing organization. Only batiks domiciled in Germany and active in

the securities business may become participants. DKV is able to immobilize a large

share of the physical securities, as it has in its vaults approximately 80 percent of all

German securities.

At the international level, the Cedel system in Luxembourg, and Euroclear in Brussels

have had some success in generating a cross-border seulement system. Both Cedel

and Euroclear provide same-day clearance and settlement services around the world to

over 2600 customers. They are linked via a so-called electronic 'bridge' which

exchanges matching and trade confirmation files between the two systems four times a

day. l3elgium, France and Germany have direct links into die Cedel/Euroclear

system.

Progress toward the full participation of the European exchanges in these international

systems has been hampered by the efforts of many individual exchanges to attract

their own foreign business. Of course, all European exchanges realize that the

exchange with the widest and most efficient international settlement and clearing

system will hold the competitive advantage. The integration process may in part assist

in establishing bridges between major Continental stock exchanges and the LSE. For

instance, links now exist between France's SICOVAM and Germany's

Auslandskassenverein (the international arm of DKV) allowing for die safekeeping of

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securities, the collection of dividends, and the execution of delivery instructions free

of, or against, payment between the markets. The eventual realization of a reliable

pan-European settlement and clearing system is deemed a vital step in the full

integration of the European equity market.

2.6. Exchange Membership and the Protection of Intermediaries and Investors

Unlike the United States or Japan, stock exchange membership in Europe does not

require the purchase of a 'seat'. Membership is usually granted by a public or private

authority of the ruling stock exchange. Usually, membership cornes with a stock

broking monopoly, except in the United Kingdom where entry to the market is free,

even for foreign firms (see Table 3). Most markets (Belgium, Luxembourg and Spain

being the exceptions) have now been opened to foreign firms.8

All countries require an annual financial report for listed companies, but most also

require more frequent six-monthly (Italy), quarterly (Belgium, Denmark, Netherlands

and United Kingdom) or monthly (United Kingdom) reports. In terms of investor

protection, Belgium, France, Luxembourg, Netherlands and United Kingdom have

adopted investor insurance measures while the Test of the Community have not (see

Table 4).

European Commission reforms and legislation relating directly to the European equity

markets are threefold in nature (see Appendix) and should have a benign effect in

terms of establishing uniform standards and greater harmonization of the currently

rather diverse set of regulations.

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2.6.1. Offering securities products and/or services

The Investment Services Directive, the capstone of this legislation, allows filins

authorized in their home country to offer a specified list of investment services

throughout the EC. Although in mid-1992 this directive was still under final

consideration, major concessions have been made to reach concensus on such issues as

bank participation on stock exchanges and off-market trading measures. The

willingness of member finance ministers to reach agreement on this directive

emphasizes the urgency felt by member governments to move forward the pan-

European integration of securities trading.

Supplementing the Investment Services Directive is the Directive on Capital Adequacy

which harmonizes the capital requirements for investment firms. Unit trusts or

mutual funds authorized in one member state and meeting basic standards set by the

UCITS Directive ('Collective investment in transferable securites') can sell their units

throughout the EC without further approval.

2.6.2. Company listings on various exchanges

The Admissions Directive coordinates minimum standards for company listings on

stock exchanges (individual countries can impose their own more stringent conditions

to 'protect the public'). The Listings Directive specifies which authorities are

competent to check and approve listing particulars for multi-country admission.

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2.6.3. Reporting and disdasure requirements

The Interim Reports Directive sets minimum standards for interim reports of listed

companies, and the two prospectus directives extend the scope and arrangements for

mutual recognition of public offer prospectuses and their distribution. The Large

Shareholdings Directive ensures that investors and regulators are informed about

changes in major share stakes, and the Insider Trading Directive harmonizes existing

rides on this subject.

2.7. Commissions and Taxation

Until the recent wave of de-regulation that affected European financial markets,

beginning with London's Big Bang, fixed commissions were the common practice in

European equity markets. Since then, commissions have become negotiable in most

European exchanges even though a dual system still persists in some markets with the

existence of a ceiling on fixed commissions. Although Belgium, Germany, and

Portugal continue to maintain a fixed-type commission structure, each allows some

degree of flexibifity (see Table 5).

Commissions are only one part of the cost of trading. Taxation of capital gains,

dividends and transactions should also be taken into account. Capital gains are

normally taxed where the investor resides, regardless of the national origin of the

investment (this ensures that domestic and international investments are taxed

similarly). Dividend payments are sometimes the subject of a withholding tax,

although in recent years many countries have removed this in order to attract foreign

investments. Transactions tax is usually proportional to the amount transacted or to

the commission charged by brokers (as is the case for the value-added tax on

commissions charged, which is prevalent in most EC countries). 9 Currently, these

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taxation practices vary across European countries and lead to distordons in the flow

and allocation of capital. The harmonization of these taxes can be expected to remain

a thorny issue well beyond January 1993, especially in so far as tax issues among

member States are still decided by the unanimity rule rather than the qualifie majority

rule.

2.8. Derivative Markets

As the general interest in equity-related derivative instrument trading increases in

Europe, inter-exchange competition is becoming increasingly pronounced. The large

markets are vying for overall dominance, while the m'aller markets are pushing to

gain niche positions. In early 1992 seven markets traded equity-related derivative

securities: the London International Financial Futures Exchange (LIFFE), the Marché

des Options Negociables de Paris (MONEP) and the Marché à Terme Internationale

de France (MATIF), the Deutsche Temin Bôrse (DTB) in Frankfurt, the European

Options Exchange (EOE) of Amsterdam, the Financial Futures Amsterdam (FTA),

and the Mercado de Futoros Financieros (MEFF) in Madrid and Barcelona. In

addition, stock options are listed on the Copenhagen and Milan stock exchanges (see

Table 6).

Strong competition among Europe's major derivative markets has eroded the dominant

position historically held by London. The March 1992 merger of the LIFFE and the

former London Traded Option Market (LTOM) was an effort on die part of London

to better its competitive position, particularly in options trading. The new LIFFE

provides trading for both option and futures contracts.

In France, option contracts are traded on the MONEP, while futures contracts are

traded on the MATIF. After the MATIF is the second largest European

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derivative market based on the number of transactions. Like France, the Netherlands

keep options and futures trading separate, with options being traded on the EOE and

futures contracts on the FTA.

Despite some efforts to introduce a screen-based trading system for derivative

instruments, the German derivative market DTB and the Spanish MEFF remains

unique among the dominant out-cry system for trading contracts. Although the

German market has developed slowly due to the prohibition of derivative markets

until 1988 by existing gambling laws, the DTB has since aggressively challenged

London's traditional strong position in German interest-rate products and successfully

launched trading of futures and options on the Deutscher Aktenindex (DAX) stock

index.

Spain has consolidated its two exchanges into one holding company (MEFF) and has

opened trading of options on the Spanish stock index (Ibex 35). In September 1992,

Italy opened its new futures market, the Mercato Italiano dei Futures (MIF'F), with

bond futures trading. In addition to the options trading already conducted in Italy,

Milan plans to begin equity-based futures trading in 1993.

The recent creation of the Belgian Futures and Option Exchange (BELFOX) provides

Belgium' s entrée into derivative instrument trading. Although the trading of its

government bond future has been disappointing, the exchange plans to boost its

position by adding option trading on the BEL-20 index and selected Belgian stocks

during 1992.

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2.9. Informational Efficiency

A previous review of the evidence on the infonnational efficiency of European equity

markets (Hawawini, 1984) concluded that they could be considered informationally

efficient that is, puces in these markets adjust rapidly and fully to publicly available

information, limiting the use of such information W earn consistently above-normal

profits.

This conclusion, however, should not be interpreted to mean that stock price

manipulation and insider trading do not take place in the various European equity

markets. In fact, the widely held view is that some individuals and institutions do

manage to earn abnormal profits by trading on privileged information, especially in

the smaller European equity markets. 10 Therefore the issue is not whether the

problem of asymmetric information exists but how European regulators could make

their individual markets more efficient and encourage insiders to reveal their superior

knowledge.

In a study of Belgium's legislative efforts to improve her capital markets by

encouraging information disclosure (Vermaelen, 1986), the author argues that

effective responses ta this problem could be classified in two categories: the

regulatory approach, through which regulations force firms to disclose information,

and the free-market approach, which attempts to create market-induced disclosure

incentives and information-signalling systems leading to voluntary disclosure by

insiders. n The former is the approach pursued in the United States, while the latter is

embodied in the UK model of self-regulation and supervision.

But despite its good intentions, the regulatory approach is unlikely, as hoped, to

increase market efficiency by reducing insider trading (the recent Belgian experience

is a case in point) and may indeed reduce market efficiency by slowing clown the

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speed with which information will be reflected in security prices (Vermaelen, 1986).

Nevertheless, on a Europe-wide basis, the effective integration of the individual

equity markets may necessitate the adoption of a minimum set of laws and regulations

covering insider trading and stock price manipulation, coupled with a strong law

enforcement agency in each country. This should build consistency across markets

and foster a level playing ground for investors, intermediaries and exchanges aliloe.

2.10. The Eurolist

The Eurolist project is one effort which has been made to improve informational

efficiency across the European Community. Currently, all twelve member States are

actively involved in this project, and it is envisioned that the five EFTA States may

likewise be added shortly after its launch. Eurolist will allow European companies to

become simultaneously listed on all EC exchanges with a single standardized

application to their home exchange. The operationalization of this objective requires a

full standardization of listing procedures-a level of hannonization well above the

current common minimum standards outlined in the listing and admissions directives

(see section 2.6.2). Eurolist now appears to have found a broad measure of

agreement among EC exchanges on these requirements and hopes to begin the service

in early 1993.

Eurolist is designed to begin with a list of at least one equity security from each of the

EC countries. It is expected that this list will be rapidly augmented by the addition of

most of Europe's blue-chip companies. The requirements for admittance include: (1)

market capitalization of over Ecu 1 billion, (2) annual sales of over Ecu 250 million,

and (3) existing international commercial operations. Given these criteria, about 260

EC-incorporated companies would be eligible, plus at least 40 others if the EFTA

countries are included.

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Companies desiring Eurolist listing should be prepared to be listed on at least five of

the EC stock exchanges. Application to Eurolist will be centralized at the company' s

home stock exchange, which acts on behalf of the interests of all EC member stock

exchanges. Following examination by the home exchange, prospective host

exchanges will make the final decision for company listing. Following EC-wide

listing, Eurolist is expected to require companies to provide the necessary ongoing

published information written in both the home language and English.

The Eurolist project provides a number of important efficiencies for equity market

participants. Companies are able to broaden their investor base and access to capital

markets at lower cost. Investors are efficiently able to compare securities of foreign

companies, and to diversify their portfolios. Exchanges are able both to gain the

ability to list foreign equities, and to broaden the exposure of their most highly traded

securities.12

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Ill. EXPECTATIONS FOR FUTURE EUROPEAN EQUITY MARKET

STRUCTURE

Despite the apparent diversity among Europe's equity markets in teins of site,

structure, regulation, taxation, trading practices, and operational efficiency, the

discussion in Section I reveals a growing convergence on a number of key themes.

Based on the conclusions drawn from these trends and the particular characteristics of

European financial centres, expectations can be drawn for the configuration of the

future European equities market.

3.1. Summary of Key Trends

The following key trends characterize the development of the European equity trading

market: (1) growing adoption of electronic technology, (2) ongoing determination by

the European Commission and member states to insure the free flow of capital within

the EC, and (3) increased inter-exchange competition for a place in the growing

market. These will continue to be the key forces shaping Europe's future trading

market.

Chief among these themes is the increasing importance of electronic technology. As

described in Section II, all of the European equity exchanges have introduced some

form of screen-based trading into their existing market. Throughout Europe, price-

setting mechanisms are moving more and more towards continuous market systems.

Moreover, a host of electronic clearing and settlement systems in most markets have

automated the back-office processing at most exchanges. With the development of

electronic depositories via computer databases, a growing trend towards the

'demateriafization' of physical paper certificates has been generated. As the listing,

20

trading, and settiement processes of securities markets becomes more automated, the

technical feasibility of reaching European market integration substantially increases.

In fact, the current technological investment by the equity exchanges is creating a

trading mechanism in which geographic diversity is increasingly irrelevant.

Secondly, the important progress made by the Commission, as well as member

governments, in reaching agreement on many of the most challenging regulatory

issues establishes more fully Europe's ability to reach an adequate level of regulatory

harmonization for true market integration. The chief examples of such determination

are the concessions made by member fmance ministers in order to reach concensus on

the Investment Services Directive in June 1992. This agreement illustrates the strong

interest on the part of member political groups in removing the barriers preventing the

free flow of Europe's capital throughout die single market. Should this momentum

continue, it seems unlikely that full European equity market integration will be

inhibited by the incompatibility of member regulation and market systems.

Lastly, despite the aforementioned positive trend towards market integration in the

technological and political arenas, the increasing rivalry between exchanges for a

greater share of the rapidly growing European equity market presents growing

problems. One of the most obvious examples of this rivalry has been seen in the

emergence of Europe's derivative markets. The investment in seven distinct markets

for derivative-instruments trading in Europe has largely been made in parallel by the

exchanges over the late 1980s and early 1990s, after die launch of the Europe 1992

campaign. The LIFFE in London lias seen its share of the European derivative

market dwindle as Continental contenders have emerged to win over some derivative

volume, particularly that done on local underlying securities. The German DTB has

leveraged its electronic trading system, cut commission rates, and set daily targets to

threaten LIFFE's most successful contract, the Bund future. The German market

share on the contract has risen from 8 percent in January 1991 to 29 percent in

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January 1992. In addition, the surge in activity on the MATIF and the emergence of a

number of markets in the smaller European countries point increasingly to a desire on

the part of local exchanges to grow domestic securities markets rather than cede

business to a centralized pan-European organization or, in the case of L1FFE, the

dominant European exchange.

3.2. Expectations for future European market configuration

Given the aforementioned forces, many scenarios have been put forward for the

structure of the future equity trading system. One scenario suggests the emergence of

a fully computerizexi system, in which physical stock exchanges disappear completely

and competition becomes solely based on the selection of competing networks.

Another possibility is the development of geographic hubs where, for example, Paris

serves the Latin countries, Frankfurt serves central Europe, and Stockholm provides a

Scandinavian trading centre. A third possibility is segmentation of the market by

investor: small retail equity trading remaining linked to the domestic market while

large wholesale trading is directed to a European central market.13

Each of the major exchanges has important strengths and weaknesses that will be

critical in the emergence of the future European equity trading system configuration.

The following discussion characterizes the key aspects of the leading markets:

London, Frankfurt, and Paris.

3.2.1. London

Numerous factors converge in enabling London to have reached, and to continue to

maintain and enhance, its premier position among European equity markets. Included

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among these factors are a historical head start in terms of capital accumulation and

trading of shares stemming from early industrialization; a long-standing technology

interchange with New York and Tokyo in the fields of telecommunications, seulement

systems and product innovation; positive linkages with other areas of capital markets

in which London maintains a key role (especially debt and foreign exchanges); and

progressive self-initiated reforms, as evidenced by Big Bang which ended fixed

commissions and made exchange entry non-restricted.

The emergence of London as the dominant financial centre in the 1980s was

accompanied by a strong rush of capital to the U.K. market. The increased liquidity

made the market a prime candidate for the development of a pan-European wholesale

equity trading market: enter SEAQ International. Since its introduction in 1985,

SEAQ International (Stock Exchange Automation Quotations system) has been a

major bone of contention among the European exchanges. SEAQ International is an

electronic quotation system for non-U.K. equities which accounts for around 95

percent of all reported turnover for non-domestic equities in Europe. Large

institutional investors have been attracted to SEAQ, not only by its reputation as

Europe's most liquid market, but also by its practice of delaying publication of trade

data until the day after the transaction. The Continental requirement that trade

information be publicized minutes after execution discourages large institutions who

prefer greater discretion for large trades. In 1992, 25 percent of the total volume for

French and Italian equities, 40 percent of Dutch equities, and 10 percent of German

equities were traded using SEAQ computer screens.'4

The frustration of Continental finance authorities' efforts to slow the dominance of

SEAQ International through Community legislation has been cited as an important

factor in the agreement made on the Investment Services Directive. Continental

exchanges felt that in order to maintain their share of the wholesale equity trading

market they would need to develop SEAQ-like markets themselves. 'If you can't beat

23

them, join them,' has been the refrain as Continental exchanges realize that European

wholesale securities trading is increasingly following the SEAQ pattern. Under the

new directive, the release of trading data for most activity will be slowed, and

national authorities will be allowed to suspend the rule for large trader or illiquid

stock transactions. Moreover, die directive allows for 'SEAQ-type' off-exchange

trading activity, a provision many of the Continental exchanges had bitterly contested.

London's position has been somewhat tarnished recently by such problems as

Sterling's recent withdrawal from the European Monetary System and a rash of

fmancial scandals-Lloyd's, Maxwell, and BCCI. But due to its leadership position in

a majority of key areas, London continues to play a central role among the European

financial markets.

3.2.2. Frankfurt

The viability of Frankfurt as Europe's fmancial centre has been consolidated by the

possibility of future participation in the Community of the Eastern European countries

and the importance of Germany in an emerging European Monetary Union (EMU).

The possible location of the European Central Bank in Germany (Frankfurt or Bonn)

further strengthens the case.

In response to this possibility, the German government has outlined a plan to ensure

the rapid development of a world-class equities-trading market. The plan includes

integration of Gennany's eight regional stock exchanges, creation of a central

government authority, and legislation of regulatory reforms which will allow money

market funds and ban insider trading. Further evidence of Germany's efforts to

establish Frankfurt as the 'Finanzplatz' are apparent in the recent emergence of

Deutsche Wtirse, 15 the DTB derivative market, the IBIS screen-based trading system,

24

Boss-Cube, and Europe's fastest seulement system. The development of a single,

'world class' financial centre is particularly affected by the introduction of Boss-Cube.

This electronic order-routing system networks the trading floors of Germany's

regional markets. As the use of Boss-Cube becomes more pervasive, the locality of

regional markets will become less relevant.

A number of features particular to the German economy, however, have been cited as

major drawbacks. Firstly, Germany's restrictive labour laws are fiable to be severely

frustrating to the fast-paced, high-pressured, long-hours trading environments evident

in the culture of other financial centres. Secondly, Germany's regional markets are

still battling for greater independence and seem unwilling completely to unify the

German securities market, as proposed by Deutsche Bôrse. Thirdly, the heavily bank-

dominated structure of the German financial system is contrary to the open capital

market orientation important to an international financial centre. Lastly, Germany's

deep-seated aversion to risk is unlike the daring, aggressive culture characteristic of

the world' s leading equity markets.16

3.2.3. Paris

Having enthusiastically embraced electronic technology, the Paris equity trading

system has made substantial progress in developing the critical trading mechanism

required of a major fmancial centre. As a model for Europe, the Paris CAC system,

patterned after the Toronto CATS securities trading system, was the model for both

the Madrid and Brussels exchanges. Moreover, in Paris full electronic seulement is

available to both French and foreign participants.

Despite such progress, strong doubts persist as to the French ability to build the

necessary liquidity within its market. France has historically been restricted in its

25

aspirations for a leading position among European financial centres due to the high

involvement of the State in French finance. Cognizant of its problems, France is re-

engineering its financial system with a reform of the French pension system and an

acceleration of the number of state privatizations. In order for Paris to remain

competitive, it must drarnatically increase the amount of publically traded companies,

release public pension funds to build the amount of available capital for investment,

and lessen the government grip on financial markets.

3.3. Fragmentation versus Unification

As an attempt to stem the flow of Continental trading volume in London, the

European exchanges proposed the creation of Euroquote. Originally called the PIPE,

Euroquote was established to build the infrastructure for a pan-European price listing

system for 300 Eurostocks, followed later by an interactive trading, clearing, and

settlement system. Even though the system was originally designed to avoid both the

domination of London and the excessive fragmentation of the European market, the

aspirations of the individual markets have led to a rejection of the Euroquote system.

At the annual meeting of the Federation of Stock Exchanges of the European

Community in May 1992, the full Euroquote system was rejected in favour of a more

moderate Eurolist system (see section 2.10). With Eurolist, EC stock exchanges will

maintain listings of other European blue-chip stocks. The failure of Euroquote

emphasizes the determination of many of Europe's stock exchanges to continue to

restrain the movement of trading volume off domestic markets.

Another important question regarding the integration of European equity markets is

the inter-exchange competition between the U.K. quote-driven trading system versus

the Continental order-driven market system. Normally, quote-driven systems would

26

be expected to be preferred by large investors who value the increased liquidity and

flexibility provided by such a trading arena. In contrast, an order-driven system

which does not require an investment of capital by the dealers, means that spreads

between bid-ask prices tend to be smaller than on quote-driven systems, at least for

small- to medium-sized transactions. Analysis by Pagano and Roe,ll (1990) confirms

these expectations. They estimated that explicit round-trip transaction costs for small

equity transactions ($2500) were 22 to 340 percent greater on the London Stock

Exchange than on the other major Continental exchanges. Yet for large transactions

($500,000), London was, in fact, 50 percent cheaper than Germany, 20 percent less

than Amsterdam, roughly on par with France and Italy, and only somewhat more

expensive than Spain. 17 Their research confirms that, in general, retail customers

would benefit from trading their smaller-sized transactions through order-driven

systems that are available in most of their local markets, whereas the larger-volume

wholesale trading of institutional investors would be more advantageous if executed

within quote-driven systems.

To cater to the preferences of both small and large investors European equity markets

are investing in the development of hybrid trading systems. The Paris market is

attempting to fit off-market block trades into its order-driven system, whereas London

is including a domestic order-driven market in a dealer-dominated environment.18

The success of such hybrid systems has yet to be confirtned.

2 7

IV. CONCLUSION

In conclusion, this paper presents a picture of fragmentation among the European

securities markets. The current state of the markets reveals a strong diversity across a

wide range of structures and organizations. This diversity can be seen as both a

strength and a weakness. Its strength resides in the opportunity for European markets

to specialize in the delivery of particular products and services. Its weakness lies both

in European markets' difficulty in playing a unified and significant role in the global

equity market, and in the obstacles that this diversity could impose on the very

integration process fostered by the EC. The intense competition among European

exchanges for position in future European markets is defeating many of the

normalizing successes created by both technological and regulatory dynamics.

Since the 'Big Bang' London has experienced a tremendous rise in trading volume.

Over that period, London has grown to dominate all other markets across almost any

dimension. The basis of this European dominance has been rooted in its superior

market liquidity. For large investors, the most attractive market is not a function of

geography, but of sheer trading activity-in short, liquidity.

In consequence, despite the efforts of national exchanges to keep wholesale trading at

the domestic level, large investors will increasingly be drawn to the single dominant

European market offering the greatest liquidity. The trend to a single wholesale

market will become even more pronounced if Europe agrees to monetary union. With

a single European currency unit throughout the Community, local markets are no

longer the natural choice for home-currency-denominated securities.

The local exchanges may continue to provide the superior pricing and proximity

valued by the small investor, but institutional investors will continue to shy away from

28

the less liquid markets. The full realization of this point by European exchanges is

critical. Large investments made by European exchanges to provide superior listing

systems or ease of clearance will continue to go unrewarded so long as the investment

is unsuccessful in raising liquidity above that of the market leader.

This paper proposes the emergence of a two-tiered system within which large

investors trade securities on a centralized European wholesale market, and small

investors continue to access their domestic stock exchange or retail market. For the

time being, the centralized, wholesale market is located in London largely due to its

superior liquidity as detailed above. As market features change, liquidity leadership

may change. As an expected result, London may be superseded by another market as

the place for wholesale trading.

The recognition of Europe' s emerging market structure is an important step in

establishing a more unified, single market in Europe. In order for Europeans to shore

up their position in the global financial markets, the exchanges must gain consensus

on the market structure rather than squander investment in building more

fragmentation into the system. Such an agreement, based on the economic drivers of

the trading participants, is vital if Europe wants to build a more competitive pan-

European equity market.

29

Notes

1. A safeguard clause allows exchange controls to be imposed where 'exceptional'short-term capital movements would seriously disrupt monetary and exchangerate policies. This is what Spain did in September 1992 to prevent furthererosion in the value of the peseta against the stronger European currencies as aresult of the currency crisis. The situation was provoked by the inability of theEC economies to 'converge' the performance of their economies.

2. Section II of titis paper draws heavily on a chapter originally written by G.Hawawini and B. Jacquillat 'European Equity Markets: Towards 1992 andBeyond', in Jean Dermine (ed.), European Banking in the 1990s, Oxford: BasilBlackwell Ltd., 1990. Data presented in the tables and Appendix have beenupdated as indicated.

3. Capitalization for Tokyo is a country total and includes the total market value ofail Japanese stock exchanges adjusted so that multiple listings are not doublecounted. See Statistics 1990, Fédération Internationale des Bourses deValeurs, Paris, p. 15.

4. Because of the large portion of stock trading which is conducted outside thestock exchange in Italy (estimated at 60 percent), the official figuressignificantly understate the actual volume.

5. The auction form of batch system is utilized to establish the opening price insome continuous markets such as Amsterdam and Frankfurt (see Cohen et al.,1986, p.17).

6. The affirmative obligation stabilization gives the U.S. specialist theresponsibility of stabilizing prices if transaction-to-transaction price changes, orprice changes over each thousand shares traded, exceed certain limits set up foreach stock according to its size. The size is measured by the stock's price andtransaction volume.

7. 'Circuit brealdng' refers to the halting of transactions if the stock market indexrise,s over a specified limit during the trading session. It is an example of anadministrative stabilization technique.

8. Recent reforms in France now enable foreigners to hold a majority interest inlocal brokerage houses; similar reforms are also underway in Belgium andSpain. These trends are significant in that the emergence of broker-dealerhouses with a majority interest in several European domestic firms provides aneffective linkage among European markets and should hasten the move towardsintegration.

9. The securities transaction tax is part of the overall tax reform programme andaims to abolish indirect taxes on securities transactions.

30

10. See Hawawini (1984), p. 148.

11. See Vermaelen (1986), p. 436.

12. See Fédération des Bourses de la Communauté Européene (1992).

13. Discussion of these three exchanges is based largely on arguments developed byPeet (1992).

14. See Whitney (1992).

15. Deutsche Bôrse is a newly formed holding company for the Frankfurt StockExchange, the futures market, and the German settlement organization.Regional exchanges will collectively receive a 10 percent direct holding in thecompany's share capital.

16. See Cooper (1992).

17. See Pagano and Roell (1990).

18. See The Economist (1992a).

31

APPENDIX

Key Directives Concerning the European Securities Market

Directive on Investment Services

Aim: Similar to the single 'passport' concept of the Second Banking Directive, italiows flans to carry out specified investment services (investment advice, broking,dealing or portfolio management) throughout the EC if they have authorization intheir home country; home member state must ensure that the investment film followsconduct of business rules.

Outlines rules on publishing of trading data; gives banks access to stock exchanges;ensures off-market trading in member states.

Introduces procedure for reciprocity with third countries; Commission may initiatenegotiations to secure comparable competitive opportunities for Communityinvestment firms in third country.

Status: Amended Proposai stage; passed Council agreement; final text expected toemerge by late 1992.

Directive on Capital Adequacy

Aim: Supplements the Directive on Investment Services by harmonizing the capitalrequirements for investment firms; subjects bank and non-bank investment firms toequivalent legislation requirements so as to ensure fair competition.

Status: Amended Proposai stage; passed Council agreement; final text expected toemerge by late 1992.

Directive on UCITS (1985, amended 1988)

Aim: Coordinates laws and rules for collective investment undertakings (UCITS);principle is that a unit trust aproved in one state and meeting basic standards set by thedirective can sell its units anywhere in the EC without further approval.

Status: Deadline 1/10/89, except for Greece and Portugal which have until 1/4/92; inforce in ail but Greece, Italy, and Portugal.

32

Directive on Special Measures for Certain Investments by UCITS (1985, amended1988)

Aim: Enables UCITS to treat certain bonds neither issued nor guaranteed by the Stateas offering similar security to State-guaranteed bonds; extends the limiting amountUCITS may invest in one specific class of security.

Status: Same as Directive on UCITS.

Directive on Admissions to EEC Stock Exchanges (1979, amended 1982)

Aim: Coordinates minimum standards for companies on stock exchanges, making iteasier for companies to raise capital on a pan-European basis.

Status: In force in all markets; countries cannot refuse a listing on the grounds thatthe company has not been listed on another exchange first, but they can turn it downfor investor 'protection' reasons.

Directive on Listing Particulars for Securities Issuance on Official Exchange(1980, amendai 1987, 1990)

Aim: Specifies which authorities are competent to check and approve listingparticulars in cases where an application for admission to official listing is made inmore than one member state; establishes the principle of reciprical agreements withnon-EC countries.

Status: Deadline: 17/4/91; 1980 Directive in force in all countries except for Franceand Italy; 1987 accepted by all but Greece; 1990 accepted by ail but Belgium andFrance. May be altered to provide the higher standards required to implementEurolist system.

Directive on Interim Reports (1982)

Aim: Sets minimum standards for interim reports of listed companies; established thatinterim reports must be published within four months of end of each six-monthperiod.

Status: In force in all member states.

33

Directive on Scrutiny and Distribution of Prospectus (1989)

Aim: Aims to harmonize mies for publishing and distribution of prospectus.

Status: Deadline: 17/4/91; In force in all but France, Greece, Ireland, and Italy.

Directive on Mutual Recognition of Public Offer Prospectus (1990)

Aim: Extends the scope and arrangements for mutual recognition of public offerprospectuses as listing particulars.

Status: Deadline: 17/4/91; implemented in ail but Belgium, France, Ireland,Portugal, and Spain.

Directive on Large Shareholdings Disclosure (1988)

Aim: Ensures that investors/regulators are aware of major changes in ownership;shareholder must inform company and/or regulator within seven days when holdinggoes above or below 10%, 20%, 33.3%, 50%, 66.6%.

Status: Deadline: 1/1/91; main problem will probably prove to be enforcement; forexample, the UK has a system where shares are registered by a company, whiteFrance and the Germany have bearer securities cleared electronically throughSICOVAM and Deutsche Kassenverein (DKV).

Directive on Insider Trading (1989)

Aim: Prohibits insider dealing, whereby investors who are in possession of insideinformation talce advantage of that information at the expense of others who are rot,and thus ensure that all investors are placed on an equal footing; includes cooperationamong national authorities.

Status: Deadline: 1/6/92; accepted by France, Ireland, and Luxembourg.

34

Directive on Securities Transaction Tax (1976)

Aim: Aims to abolish indirect taxes (stamp duties) on securities transactions; does notapply to VAT on commissions.

Status: Proposai stage; this directive is part of the overall tax programme of the EC.

Source: Compiled from various sources, including The Banker; the EuropeanCommision Directorate General XV, Completing the Internai Market: A CommonMarket for Services; and EC Financial Newsletter, Clifford Chance.

35

References

Asian Finance, 'EC brokers fear "fragmentation"', July 15, 1991, 61-2.

772e Banker, 'The Bottom Line', May 1991, 64.

Cohen, K., S. Maier, R. Schartz, and D. Whitcomb, The Microstructure of SecuritiesMarkets, Englewood Cliffs, NJ: Prentice-Hall, 1986.

Commission of the European Communities, Completing the Internai Market: ACommon Market for Services, Brussels: 1990.

Cooper, Wendy, 'The Finanzplatz fairy tale', Institutional Investor, May 1992, 29-36.

Corrigan, Tracy, 'Small markets stock up', Financial Times, March 19, 1992, 32.

Dermine, Jean, European Banldng in the 1990s, Oxford: Basil Blackwell Ltd., 1990.

Dombusch, R., Open Economy Macroeconomics, New York: Harper and Row,1980.

The Economist, 'Last orders?', March 14, 1992, 85. (a).

The Economist, 'Delayed harmony', July 4, 1992, 76-79. (b).

Fédération des Bourses de la Communauté Européene, 'The Eurolist Project' Ref.:K775, September 3, 1992.

Fédération Internationale des Bourses de Valeurs, F.I.B.V. Statistics, Paris: FIBV,1990.

Hawawini, Gabriel, 'European equity markets: price behavior and efficiency',Monograph Sertes in Finance and Economics, Salomon Brothers Center for theStudy of Financial Institutions, New York University, 1984.

Hawawini, Gabriel and Bertrand Jacquillat, 'European Equity Markets: Towards 1992and Beyond' in Dermine, Jean, op.cit., 1990.

ISSA Handbook, Zurich: International Society of Securities Administrators, 1991.

Levy, Haim and Marshall Sarnat, 'International diversification of investmentportfolios,' American Economic Review, 60 (4) 1970, 668-75.

OECD, National Accounts Main Aggregates Volume 1, Paris: OECD, 1992.

36

Pagano, Marco and Alisa Roell, 'Trading Systems in European Stock Exchanges',LSE Financial Marketing Group, London School of Economics Discussion PaperNo 75, 1990.

Peet, John, 'A survey of financial centres', 772e Economist, June 27, 1992.

Rawsthom, Alice, 'Re-engineering the Paris stock market', Financial Times, March24, 1992.

Spicer and Oppenheim, Guide to Securities Markets Around the World, New York:Wiley, 1988.

Vermaelen, Theo, 'Encouraging information disclosure', Tidjdschre voor Economieen Management, 31 (4) 1986, 435-50.

Whitney, Glenn, 'Single Stock Market Seems More Remote As Exchanges Squabble',The Wall Street Journal Europe, July 24-25, 1992, 1,10.

37

Table 1 European equily markets: size and activily, December 1991

Market Market Volume ofIndividual share

ownershipMarket capilalizalion capitalizalion/ I_ isled Foreign transactions Turnover Number ol as % ol adull

capitalizakon (ECU million) GDP stocks stocks (ECU million) ratio sections populagon(a) (b) (c) (d) (e) (I) (g) (h) (I)

Belgium 2,230.150 53,186 36.2% 336 234 6,722 0.13 OM SM OTC 10%Denniark 265.167 33,441 34.1% 286 11 7,837 0.23 OM SM TM OTC -France 1.803,071 259,308 29.1% 782 231 91,583 0.35 OM SM OTC 13%Germany 563,253 276.715 23.8% 667 239 315,912 1.14 OM SM TM OTC 6%Italy 177,359,200 114,989 13 6% 226 2 19,084 0.17 OM SM TM OTCI. uxuniteoing 353,614 8,433 125.3% 783 180 123 0.01 OM OTCNetherlands 232,884 101,541 47.7% 497 234 31,375 0.31 OM SM TMPortugal 1,284,348 7,143 13.9% 180 1,583 OMSMOTCSpain 12.317,208 94.990 24.3% 434 3 28,445 0.30 OMSMOTCUnited Kingdom 522.020 728,976 96.9% 2.456 604 441,963 0.61 OM SM OTC 22%

(a) Armants are in millions of local ClIfloncy, , figures are for domestic car:4;111z ation only(b) Translations in ECU based on year-end 1991 exchange raies givert by the I' IBV(c) 1991 GDP eslitnates aro provisional; OECD Main Economic Indicalors, Jurer 1992(d) Total number of listed stocks (domeslic and !Dralon), excluding invesIntent tends(e) Number of Foreign listed stocks

franslations in ECU based on year.und 1991 exchange raies gluon by lhe 1II1V(g) Annual volume of transactions (I) diveled by total market capitalizakon (b)(h) Markets are: olltcial market (OM). second market (SM), lhird market (I M). and over • Ihe-counter markoi (0 1 C)(i) Source: Pro Share (International Harald Tribune, Oclober 3 4, 1992)

Source: Fédération Internalionale des Bourses do Valeurs, 1991; Boisa de Valores de Lisboa Annual Synthesis ol the Securilies Market 1991; OECD

Table 2 European eqully markets: structure and organizatIon, December 1991

011icial Tradinghours(6)

Floortrading(b)

011-floortradingIci

OTCmarket(d)

Continuousmarketfol

Screentrading(I)

Physicaldelivery(g)

Centralseulementand clearing(h)

Margintrading(I)

Daily 'finiton price(g

Belgium 12:50.14:30 Yes Yes Yes Yes Yes Yes/No No No YesDenmark 09.00-15:30 No Yes Yes' Yes Yes No Yes No NoFrance 10:00.17:00 Yes Yes Yes Yes Yes No Yes Yes YesGermany 11:30.13:30 Yes Yes Yes Yes Yes Yes/No Yes No NoItaly 10:00-13:45 Yes Yes Yes Yes Yes Yes/No Yes Yes NoLuxembourg 11:15-13:15 Yes Yes Yes No Yes Yes/No Yes No YesNetherlands 09:3016:30 Yes Yes No No Yes No Yes No NoPortugal 11:00.15:00 Yes Yes Yes Yos Yes Yes/No Yes No YesSpain 09:30-17:00 Yes Yes No Yes Yes Yes/No Yes/No No YesUnited Kingdom 08:30.16:30 No Yes Yes' Yes Yes Yes/No Yes Yes No

(a) Belgium: Cash market-corbeille (most active sharos); Germany: Floor trading (screon trading hours on IBIS: 08:00 . 17:00); Italy: lieavy trading may protracl hours wellallarnoon; Netherlands: a 16:30 . 22:30 session for the most active domestic securilios M coincide with the NYSE; Portugal: Trade by computer and outcry systems (trade by

(x) computer extended unhil 15:00; Spain aise maintains a taler session to coincide with NYSE; London allows trading outsfile ol hours€13 (b) Introduction ol continuous markets usually makes the Iloor tees activa; floor trading continues lo exis1 lot mail l'ados in Franco

(c) 011-floor trading hours (or selective markets: France, 10:00 . 17:00; Germany 06:00.17:00(d) Unollicial and non-regulated OTC markets unless indicatod by an asterisk; asterisk indicales a regutatcd OTC market(o) 011-floor computerized centralized market(I) 011-tloor decentralized electronic market, e g., London's Stock Exchange Automated Ouotation market and Gormany's IBIS(g) Saturnes are hand-delivered to seille the deal (as opposod "dematerialized- book-entry transie/ systems that are generally oporaled by a central clearing authonty; seo (h).

'Yes/No- indicales a central deposilory system with physical delivery possible il desired by investor.(h) The book entry system Is operated by a central authority in France, Luxembourg, the Netherlands and Spain. liowever, seulement and delivery dolays vary botweon countries

and dopend on whelher the transaction occurs in cash or Me delivery market. The TAURUS electronic book system wiN ellminate physical delivery In UK alter 1993-94(i) Margin trading is the process of buying securities with money borrowod from brokers. This Is forbidden In most combles or regulated as In Denmark.

Where margin trading Is allowed, foreigners can also deal on mare.(j) UMM for selected countries are as lollows: France, ranges from +1-5% for leu field sec/Mies to +21.20% to -10.75% for more liquld and currently includes only the stock market;

Germany, no bels in principle but a change ol +1 .5% from the lest fixed price should be reported Io the ManagIng CommIllee of the Stock Exchange belote trading resumesPortugal. +1.15% in consecutive sessions (trade by continus system: pre-opening 30%, other deals 5%); Belgium. +/-10% In Corbeille cash market. +1-5% In Parquet andsecond market. and no limit in lonvard market; Luxembourg, 41-10% for equillos

Source: Amsterdam, Brussels, Copenhagen, Franklurt, Lisbon, Luxembourg, Milan, Paris Stock Exchanges; Audiblepana, Madrid; Touche Ross, London; ISSA Handbook, 1991.

Table 3 European equily markets: membershlp and regulallon, December 1991

No. 01brokers

Droitesmonopoly(a)

Somholding(h)

Minimumcommission(C)

No. olexchangos(d)

11ulenn 335 Yes No Fixed 3 (Brussels)()enfilant 29 Yes No Negoliablo 1 (Coponhagen)France 57 Yes No Negoliablo I (Paris)Germany 1303 Yes No Fixed 8 (Franklurt)Hely 255 Yes No Negoliablo 10 (Milan)Luxembourg 84 Yes No Negoliablo I (Luxembourg)tlelherlands 150 Yes No Negotiable I (Amsterdam)Portugal 1 I Yes No Fixed/Negoliablo 2 (Lisbon)Spain 87 Yes Yes Fixed 4 (Madrid)United Kingdom 403 No No Negoliablo I (London)

(a) Only aulhorized brokers can engage in the brokerage acti yily in Mese cotonnes(b) Drokers can ho required lo hold a sent on Ibo trading Iloor la perform Meir activities. In Spain IN) sont is granted.(c) For more information, see Table 5.(d) Number of stock exchanges in a ennui country with the location of the principal oxchangu gluon in the pareiltoses.

8 Source: Amsterdam, (Missels, Copenhague, Frankhel, Lisboa hm:fribourg, Milan, Paris Stock Lxchanges: Atiddeispana. Madrid, louche Iluss, London; ISSA I landbook, 1991.

Table 4 European equity markets; membership and regulatIon, December 1991

AccessI oforeignlirms

Addilionalrequiremenlslorloreigners

Annuellinancialstatemenis

Olherlinancialslalomants

InvestorInsuranceorguarantee

Regulalorybody(a)

Belgium No • Yes Ouarterly Yes CLIFDenmark Yes No Yes Ouarterly No DSAFAFrance Yes Yes Yes Yes Yes COO/COVGermany Yes No Yes No NoIlaly Yes No Yes Semi•annually No CONSOBLuxembourg No No Yes Yes Stockbrokors LMINetherlands Yes No Yes Ouarterly Yes SONPortugal Yes Yes Yes No CMVMSpain No Yes Yes No CNMVUnited Kingdom Yes No Yes Monthleuarlerly Yes SFA

lai CB, Commission Bancaire et Financier(); DSAFA, Dantsh Suporvisory Aulhority of Financial Allairs: COB, Commission dos Opacifions do Bourse;Mi, Conseil de Bourses de Valeurs; CONSOB, Commissione Nazionale per la Sociale e la Borsa; LMI, Luxembourg Monotary Institution;1—à SFA, Securities and Futures Aulhority: CMVM, Comissao de Morcado do Valores Mobiliarios; CNMV, Sociedad Redora Boisa y Comision NacionalMercado de Valores; CNMV, Sociedad Redora Boisa y Comision Nacionai Morcado de Valores

Source: Amsterdam, Brussels, Copenhagon, Frankfort, Lisbon, Luxembourg, Milan, Paris Stock Exchangos; Audihispana, Madrid; Toutim Poss. tondon; ISSA I landbook, 1991.

Table 5 European equily markets: commission slructures, December 1991

Commission lypoNegoliable Fixod(a) (b)

Belgium No YesDenmark YesFrance YesGermany No Yes (c)Italy Yes (d)Luxembourg Yes NoNetherlands YesPortugal No 0.004%-0.5%Spain Yes 0.8 pis per shore price

1.5 pis under 500 pts0.25% for shore prices above 500 pts

United Kingdom 0.0%-0.2%

(a) Commissions may be lully negoliable or nogotiable within specilied ranges. Tho data in this colunm indicalo the usual range of obsorved commission tales(b) Commissions can be lixed or Iixed within a specilied range or lixed up to a certain amount above which they become negoliablo

1\7 M German specialisis require 0.06% of net value lor shares, banks charge 1.0% lot shares(d) Ilaly, maximum 'Unit of 0.7% but mosl banks asking only 0.1%

Source: Amsterdam, Brussels, Copenhagon, franklurt, t isbon, Luxembourg, Milan. Paris Stock Exchangos; Audihispana, Madrid, Touche Ross, London; ISSA I Lindbook. 1991

Table 6 Derivative securIlies markets In Europe, December 1991

Stockoption

Nuntberlisted

Stock indexoption

Stock indexfuture

Option onstock indexfuture

fradingmarket

Belgaum (a) No No No No BEL FOXDormi» Yes 6 No KFX KFX Coponhagon Stock ExchangeFrance Yes 23 CAC401MONI CAC401MAlIT CAC40/MATIF MATIF (futures); MONEP (options)Gerntany Yes 67 DAX DAX No Deutsche Termin BoiseItaly Yes MIFFLuxembourg No No NoNetherlands Yes 23 XMI FTAA XM1 EOE (options), FTA (futures)United Kingdom (b) Yes 75 FTSE 100 Yes Yes LIFFEPortugal No No NoSpain Yes 0 Ibex 35 No MEFF

(a) BEI. FOX oponed trading of mosily governmeni bond futures Duc 1901; beginning option trading in 1992(b) LIFTE (London International Financial Futures and Options Exchango) houses murged L rom and LIFFE since March 1992

Source: Amsterdam, Brussels. Copenbagen, Franklin Lebon, Luxembourg, Milan, Paris Stock Exchanges. Audelaispana. Madrid. louche Iloss. London, ISSA I tandbook. 1991