The Sun Never Sets On The Nasdaq
By Marius Meland
Forbes
Dr. Evil has nothing on the Nasdaq Stock Market.
The Nasdaq, which has been vying with the New York Stock Exchange for primacy in the U.S. for three decades, makes no bones about its ultimate ambition: global domination. In the process, the technology-laced marketplace hopes to crush smaller electronic exchanges and leave the Big Board in the dust.
In the past year, Nasdaq CEO Frank Zarb and Nasdaq International CEO John Hilley have worked hard to build a global empire on which the sun never sets:
In Japan, the Nasdaq is teaming up with Softbank and the Osaka Stock Exchange to open a stock market next month.
In Canada, the Nasdaq is planning to open an arm in Montreal early next year.
In Europe, the Nasdaq just unveiled plans for a pan-European market to open next year in conjunction with iX, the new market that brings the London and Frankfurt exchanges together.
The Nasdaq isn't the only marketplace with international ambitions. Instinet, the electronic network owned by British media company Reuters, is also preparing for global equity trading. Instinet is a member of 18 exchanges around the world but can trade in 40 markets. Soon, the network, which is open to retail investors through E*Trade (nasdaq: EGRP), will offer American investors an unprecedented opportunity to buy shares locally in companies like Deutsche Telekom (nyse: DT), Sony (nyse: SNE) and British Petroleum (nyse: BPA), all of which are currently available only as American Depositary Receipts (see related story: "Instihot").
"The most important trends in equity markets in the coming years will be global consolidation and empowerment of the individual investor," says Hans Stoll, a professor who heads the Financial Markets Research Center at Vanderbilt University. "In the future, there will be fewer exchanges, and the role of the broker-dealer will continue to diminish with the propagation of online trading."
What's at stake is control over the world's biggest stock markets, with $25 trillion worth of stocks changing hands at an increasingly rapid pace. The Nasdaq knows that it doesn't need a presence in every market in the world, as long as it's anchored in the cities with the greatest trading action: New York, London, Frankfurt, Hong Kong and Tokyo. Most importantly, the Nasdaq wants to have a footing across the world's time zones so that it can be open all the time.
"What we're creating will change the way people trade stocks," says the Nasdaq's Hilley. "Soon, you'll be able to trade Nasdaq stocks around the clock. And you will hardly notice that the actual transaction takes place in, say, Japan, because the front end will be seamlessly integrated."
Hilley envisions a day when anyone can trade stocks in big companies like Microsoft (nasdaq: MSFT) anywhere, anytime. Today, many individual investors who can't trade during the daytime have no option but to place limit orders at night using their online brokerage accounts. The broker will execute the trade the next day, provided that a match can be found. Most online brokers now offer extended trading hours through electronic trading networks, but the low turnover rate at these networks creates liquidity risks that trouble many investors, who prefer liquid markets so they can trade without affecting share price.
Under a global network, however, Nasdaq trades would chase the sun (see map above). There would never be a shortage of buyers and sellers, eliminating liquidity risks. And the Nasdaq could safely lock up at night in the U.S. with the assurance that investors would be able to continue trading in other markets, saving huge transaction costs. The stock market, like the foreign exchange market, would finally become truly global.
But to reach that lofty goal, the Nasdaq must overcome some seemingly insurmountable hurdles. International stock trading is a labyrinthine game that, up until now, has been the exclusive playground of Wall Street professionals, says Larry Tabb, a leading expert on trading systems and a director for the Tower Group, a consulting practice.
"The effects of globalization will eventually trickle down to individual investors, but there are many issues, such as foreign exchange, taxes and language barriers, that will make it difficult for most investors to trade overseas stocks," says Tabb.
Here are some of the most difficult challenges that a global stock market faces:
Regulation: Each jurisdiction has its own regulatory agency. As a result, the rules of the game are different in, say, Europe and the United States. The upshot is that most markets have become liberalized and are moving toward universal accounting standards and trading rules. The International Accounting Standards Committee is developing universal accounting standards that could someday supersede national standards. In addition, most countries have abolished laws that banned foreign ownership. The Nasdaq hopes to get around the problem by adopting highest-common-denominator standards.
Trading system: Another possible obstacle. The Nasdaq is an over-the-counter marketplace (not an exchange), where dealers make markets in stocks to ensure that investors can get their orders filled. Most big exchanges are similar to the New York Stock Exchange, where trading is centralized at the floor. The Nasdaq hopes to ease its entry to Europe with a mixed model of a central limit-order book, where investors' orders are matched automatically through a computer, and a dealer market where broker-dealers make markets in stocks.
Foreign exchange: The Nasdaq wants to create a market where foreign exchange isn't an issue. U.S. investors will likely see foreign stocks denominated both in dollars and the domestic currency. The Nasdaq will use a bank to convert currencies with minimal transaction costs. But, truth be told, investors will still have to worry about foreign exchange risks when they buy foreign securities. If the euro tumbles, for instance, European shares will be worth less in dollar terms.
Technology: Markets around the world use different software and hardware to conduct billions of transactions per day. The Nasdaq's plans to tap into foreign markets require compatible technology, potentially an IT nightmare (see "British, German Stock Exchanges Face Merger Snags").
In the end, the Nasdaq and other players will have to hope that technological progress will spearhead regulatory reform to create a global stock market. If history is any lesson, that's exactly what will happen. The question is whether it will happen fast enough to quench investors' thirst for round-the-clock, round-the-world trading. |
