The Coming Global Digital Stock Market
Prepared Remarks By
Frank G. Zarb
Chairman and CEO
National Association of Securities Dealers Inc.
Before the National Press Club
Washington, D.C.
Wednesday, June 23, 1999
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Thank you for the gracious introduction Larry (Lipman, president of the press club and with the Palm Beach Post).
I recognize some faces here (both in the balcony and at the tables) from my days in government during the energy crisis, others from my time on Wall Street, and still others from my more recent times at the NASD.
I want to talk to you about the stock market of the future as it is being shaped by today?s information and digital age. Never before have so many people around the world had access to so much information, with the ability to act on it instantly through advanced technology.
It is access to information by people ? from Asia to the Americas to Europe ? that is shaping the stock market of tomorrow. When so many people have access to so much information, it is inevitable that they want to act on it immediately. No waiting, instant results. This phenomenon is shaping the 24-hour, seven-day-a-week, global, electronic stock market that we will soon see. Technology is the enabler to make all this happen, but it is information that is the driver.
I am also going to tell you how we at the NASD will help make this stock market of tomorrow happen.
Until recently, stock trading in the U.S. was much the same as when it began on Wall Street in the late 18th century. Then the Internet and advanced computer and communications technologies came along, and all that changed.
What The Stock Market Of The Future Will Look Like
In a very few years, trading securities will be digital, global, and accessible 24 hours a day.
People will be able to get stock price quotations instantly and instantly execute a trade anytime of day or night, anywhere on the globe, with stock markets linked and almost all-electronic.
Trading floors and paper, for the most part, will be rendered obsolete by competition and technology.
Investors will use not only their home or office computers, but also will commonly use cellular phones, pagers, and palm-sized computers to access the markets on the Internet, get price quotes, and execute trades through their brokers. Access to information and acting on it is what it?s all about.
Investors will even be able to get programmable computerized reports on the performance of their personal investments through their car radios while driving to and from work. At the office or at home, they will be able to get the same information broadcast to them on a digital TV.
All of this will be available in an orderly, fair, well-regulated, and lower-cost environment, with improved high-tech electronic surveillance of trading to protect the integrity of the markets.
As for stock markets, they will see global alliances, mergers, and new electronic ventures. That will give companies listed on these markets access to pools of capital internationally, not just domestically, and consumers will be able to invest in a worldwide list of companies as easily as trading locally.
This 21st century stock market will be multi-dealer, computer-screen based, technology-driven and open to all ? all because people will have access to information that they want to act on.
This new market will bring benefits to investors, listed companies, and the economies of countries. Trading will cost less for consumers. Markets will have more liquidity. Raising capital for companies will be easier and more efficient. Entrepreneurial businesses in both established and developing economies will be encouraged. New investors and markets will grow in places like China. Investors from Europe to Japan to the Americas will invest across borders with ease.
Factors Driving The Change
Several factors are driving the changes.
The first is that advances in computer and communications technology, glued together on the Internet, are shattering geographic boundaries and enlarging the investor class. The new investor world, from the smallest individual shareholder to the largest institutions, is demanding, and starting to get, more instant access to information and faster execution of trades.
About 96 million people in the U.S. now have access to the Internet; a half billion worldwide are expected by the beginning of next year. According to one survey, 54 percent of American homes have computers. E-commerce, a word coined just a couple of years ago, was estimated by one recent survey at $102 billion last year, with people buying everything from music to financial products online. Physical markets are being challenged by the computer network.
The Internet also is resulting in instant information, and people want to be able to act on that immediately to improve their investments. There are about eight million online brokerage accounts in the U.S. now. And estimates are that about 35 percent of individual investor stock trades ? that?s numbers of trades, not total share volume ? are made through the Internet, up from about 20 percent last year. Of total trades in stocks ? including those by institutional and individual investors ? 20 to 27 percent are done online, depending on the day.
The second force driving change in investing is demographics. People are living longer and investing more for retirement. In addition, the number of new investors in Europe and Asia is rapidly growing.
Mr. and Mrs. America are now in the stock market. When I started in this business, the market was mostly composed of rich people selling stock to each other. That is obviously no longer the case. Almost half (45 percent) of U.S. households now own stock, compared with only five percent at the end of World War II. Those retail investors account for 75 percent of all Nasdaq trades ? again, trades, not share volume. In 1980, stocks accounted for only 10 percent of U.S. household wealth. By 1998, it rose to 25 percent.
The middle class has become a potent force in the stock market. This will have significant political consequences. For example, the next time there is a debate in Congress on issues such as capital gains taxes or other matters that were once considered interests of the wealthy, there may be a different tone and possibly a different outcome. We are witnessing the democratization of our capital markets and our challenge is to make certain this process continues. We must think about the big picture.
Elsewhere in the world, the number of investors is set to boom. There are a billion people in China and as that economy modernizes, there will be many millions of potential new investors. Japan?s investing profile is changing ? with more emphasis on equities. This second largest economy will help to lead the changes to come.
The third driving force for change is that the economy is now more global and more interconnected, and companies want to be able to raise capital worldwide in stock markets that fit their business plans. Many want their stocks to be traded where their products are sold. Investors the world over want to trade in the U.S. markets, and foreign companies increasingly want to list their traded stocks here.
Globalization is proceeding at a rapid pace, with international alliances and ventures and cross-border businesses leading the way. This trend is continuing in virtually all industries, with American and foreign companies forming subsidiaries and joint ventures. Internet companies are the latest entry.
Stock Markets Must Respond To Change To Stay Relevant
The move toward an electronic, global interconnected world of investing is coming whether we want it or not. The market force, as always, will have its way.
The existing stock markets, including our own, do not now provide the architecture or systems to serve the future marketplace. Most traditional ways of trading securities don?t rise to the standards of the Internet age. Listed companies and investors want improvements in the process of trading stock.
A next generation of stock markets is needed to fulfill global capital formation and liquidity requirements and to provide worldwide, instant price discovery and trade execution in a fair, orderly, low-cost and well-regulated environment, without time-zone limitations.
The best way to deal with this changed world is to embrace it, not fight it or try to slow it. That is how a large number of Nasdaq-listed companies have taken advantage of change and, in turn, caused more and better change.
The securities industry in the age of the Internet will have to adopt the Internet technologies, extended hours, globalization of stock trading, lower trading costs, better products, instant price discovery, instant trade execution, and the ability to trade anytime and anywhere in the world. Also needed is a new dimension of competitiveness and open and transparent markets. In this new marketplace, middlemen will have to add value to survive. Stock Markets will have to become cutting-edge service providers.
These changes are a massive challenge to old-line market systems and traditional institutions and require that higher priority be given to the needs of investors, listed companies and Market Makers that add value. None of this is easy or simple. The natural urge is to preserve the existing model. It?s comfortable and profitable in the short run. However, the status quo no longer adequately serves and it will not survive.
NASD Strategy Is To Embrace And Facilitate The Changes
Our strategy at the NASD and at Nasdaq-Amex is not only to embrace the changing technological and investing environment, but also to help move the electronic network forward. We have made great strides, but much is left to do.
The Nasdaq Stock Market, the first all-electronic market, is constantly upgrading its capabilities. In 1971, in what was then a revolutionary move, Nasdaq began trading on a screen-based automated securities quotation system that linked the terminals of market makers nationwide. Today, a billion shares a day of trading is now routine and our capacity is 1.75 billion and will be 2 billion by year-end. We are engineered for 4 billion
Our Web site, Nasdaq-Amex.com, now experiences up to 24 million hits a day and is being upgraded to provide real-time stock quotes, rather than quotes on a15-minute delay. It also will have links (through Internet portal companies) to brokerage firms to allow investors to trade. Also in the works is a new Nasdaq screen that will allow consumers and brokers to see pricing and order information in more depth.
We also are reinventing the American Stock Exchange by automating trading and improving its products. That acquisition was one step in our vision to create a worldwide, high-tech trading network delivering more and better products at a lower cost.
Automating Amex?s trading will lead to more efficient pricing, faster trade execution and reduced transaction costs. Amex leads the way in innovation of new products such as Nasdaq, Dow, and S&P indices and "spider" products and options. Those products are good for the market and will be expanded.
Amex will be a place for companies that need the sponsorship of a specialist. Some high-volume stocks like Microsoft, General Electric, Starbucks and others trade much better in Nasdaq?s multi-Market Maker environment. Other companies with a different profile will do better in a specialist system such as the Amex.
Now a word on the international market. We need to build on our successful domestic stock market model internationally. We are continuing to explore overseas ventures and alliances.
On June 15th, we announced an effort to introduce an all-new electronic, Internet-based stock market in Japan. Called Nasdaq-Japan, it will give Japanese growth companies the ability to raise capital and trade in both markets. Japanese investors will have access to those stocks and to Nasdaq stocks. We are fortunate to have a high-quality Japanese partner, Softbank, which shares our global views. This venture will be led by a Japanese management team.
The plan is that while the U.S. Nasdaq is open, Japanese investors will be able to trade in all of the Nasdaq stocks on Nasdaq-Japan. After we close in the U.S., Nasdaq-Japan will trade in the top 100 Nasdaq companies in Japan. In addition, some of the Japanese stocks will list with us in the U.S. so Americans can trade those Japanese entrepreneurial companies. Thus, Nasdaq-Japan could have an almost around the clock trading day. Combined with our coming evening trading hours in the U.S., Nasdaq?s top stocks will, in effect, be trading around the clock either here or in Japan.
Working with our Japanese partner, we should be able to leapfrog into the next generation stock market technology.
We also are working on a cross-listing program and have a joint Web site with the Stock Exchange of Hong Kong that will enable U.S. investors to trade in Hong Kong securities and vice versa. In a pilot project, selected Nasdaq companies soon will trade on the Hong Kong Exchange, and Hong Kong companies will trade on Nasdaq. The new Web service allows investors to review financial data and maintain their portfolios for stocks on both markets in either U.S. or Hong Kong dollars.
China has important potential as a securities market. During this year we will open an office in Shanghai. China is poised to become a major economic force and we must connect our markets for the benefit of both countries.
In addition, we just announced a deal with the Australian Stock Exchange to co-list and co-trade stocks.
In Europe, we are investigating joint programs in several markets, including alliances with existing exchanges and forming new ventures.
Our goal overall is to expose listed companies to global pools of capital and our American investors to non-U.S. listed companies.
There are two important points to make about cooperative ventures. First, stock markets are worth more when they share and are shared with. This principle is a shift from the traditional strategy of "come list your stock with us" and then monopolizing the trade flow. Second, cross-border alliances and joint ventures require patience and skill, especially when there are significant cultural and political differences.
We aren?t limiting ourselves to stocks in our new ventures. Recognizing that investors will want ease-of-market access through single entry points, we are investigating the possibility of adding electronic futures contracts to our platform.
Under consideration is the creation of a new, electronic futures trading and clearing system in the U.S. that initially would start with Treasury debt instruments. We would share ownership of this for-profit venture with major investment firms and have begun preliminary talks with some.
Once established, this platform could be used to connect to futures trading internationally. The U.S. futures venture also would fulfill one of our major aims: to align our interests with the key investment firms that are important to the Nasdaq market.
The aggressive and innovative strategies we are pursuing will require financing and the most effective organizational structure possible.
Restructuring of the NASD, along the lines that various overseas markets have done, may aid our goals.
We are weighing the option of separating our self-regulatory arm into a well-funded, stronger independent entity. This could be followed with a plan to issue stock in The Nasdaq Stock Market ? potentially first to key investment firms and key listed companies in a private placement, and possibly later to the public in an initial stock offering. That would raise capital to invest in the technology infrastructure still to come.
Some industry leaders have suggested that we study merging our regulatory arm with the NYSE?s to gain efficiency, savings, and higher quality. A high-tech, independent single regulator, jointly owned by the markets, with advanced electronic surveillance could be better for investors, the stock markets and the securities industry. This could lessen costs and increase depth of regulation, as well as eliminate potential conflicts of interest between regulators and the stock markets. Oversight and investor protection is the cornerstone of a successful market. If a joint, separate company would do a better job, we should be willing to make it happen.
Our thinking is to open up our stock markets to investment from market participants and eventually the public, so they can participate in our growth and financial success and so we can raise the needed funds to grow and continue to modernize.
If our stock market and our regulatory arm become better and stronger, it would benefit all of our thousands of member firms, including small broker/dealers.
Extended trading hours is another challenge for the industry.
Investors want it, so extended hours will be a reality. The implementation date seems to be the big question. People want to be able to trade their personal stock portfolios at a time convenient to them.
To its credit, the SEC will host a summit on June 30th for the industry to discuss the evening hours details and implementation. We also are working on a plan for small broker/dealers to help them benefit from extended hours without having to make a major investment. Ideally, extended hours shouldn?t be implemented piecemeal by exchanges or the new electronic communications networks that trade stocks. Investors would be best served if the industry could move to new hours in a coordinated way. The summit hopefully will result in positive recommendations to achieve that.
Extended hours could benefit investors, issuers and our members.
New Type Of Competition Needed For Stock Markets
Major stock markets must play an important role in this new trading world. Competition must be open and fair. Open competition and a level playing field brings fairness, investor confidence, and a healthy marketplace.
Where we still have outmoded anti-competitive rules and practices related to the ability of a listed company to leave one exchange for another, they need to be eliminated. Investors and listed companies want rules that give them choices and efficiency.
Obviously, I am referring to the ongoing debate over the NYSE?s Rule 500, which makes it impossible for companies to seek the best market for their shares and move from the NYSE once they are listed.
Large companies like GE and IBM may do better trading on Nasdaq than on the NYSE. Our larger capitalized companies like Microsoft and Intel find maximum liquidity and effective price spreads on Nasdaq. Investors and companies would be better served if Rule 500 and other similar barriers were 100 percent eliminated.
The NYSE must act on its own or government agencies, the courts, or Congress will act to protect investors and consumers by forcing real reform on these outmoded rules.
In light of the new world of investing, there also will be a need to examine how many stock markets are needed. The Internet has just begun to change the landscape. We have had some consolidations of exchanges already and more will come.
In addition, electronic communications networks ? ECNs ? which are exchange-like entities that trade securities, are having an impact. ECNs match orders to buy or sell stock in specific quantities at specific prices in private transactions between customers, some of which are brokers, some institutions, and some individuals. ECNs are allowed to charge fees for access to their buy and sell orders. Market Makers in Nasdaq can?t charge such fees and that causes an unfair playing field.
The problem I see is that the proliferation of ECNs ? there are nine now ? could result in fragmentation, confusion, and higher costs in the market. I don?t have a problem with the creation of these companies by investors to make money. That is the American way. But, how the ECN community will fit together with the total market and impact investors is an important question. We need to avoid fragmenting the market and ensure that we are all playing by the same rules. A broader, deeper market is good for investors because it increases liquidity and price transparency.
Conclusion
It seems clear that stock markets of the future will have a redefined purpose and reinvented architecture, all because more and more people have access to more and more information that they want to act on instantly. The Internet and other technology advancements will provide the tools allowing us to bring a new level of service to the marketplace, with investor-friendly systems bringing buyers and sellers closer together and eliminating intermediaries who don?t add value. The momentum has begun.
Circa 2005, or even earlier, price information will be available globally, electronically and paperless, and accessible equally to all, individuals as well as institutions, in real time. There will be fair, transparent, and immediate execution of trades. Market Makers will be connected globally, 24 hours a day. Stock markets will be linked with new platforms, ventures, and alliances on a 24-hour basis. Competing for stock listings will give way to global listing. Cross-border stock trading barriers will be reduced. Trade rules and accounting standards will help accommodate this as investor needs influence the political process. Costs of processing the buying and selling of stocks will drop dramatically due to technology and competition. Regulation enforcement will be better due to increased electronic surveillance. Better regulation will bring an increase in investor confidence, the underpinning of a successful market. In turn, investor confidence will help raise capital and maintain liquidity, thus helping to build economies and create jobs.
A natural evolution to such a new generation stock market is now underway. The leaders in this new world of investing will be the ones willing to be agents of change to best meet the needs of investors and companies. The underpinning of all of this change has to be to do what is best for investors and companies.
If done right, the stock markets of the future will be even better vehicles than today in helping companies grow, creating jobs, providing fair investment opportunities for people, and in improving economies.
The NASD intends to be a leader, not a follower, to help make all this happen.
In a few years, some of you, while having lunch here, may be making a stock trade using a hand-held computer or similar device ? on Nasdaq here, or with one of our affiliates around the world.
Thank you very much.
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