We've heard about the pressures for reform as well as Nasdaq's
response to those pressures. Academic studies have prompted
regulatory pressure. Technology advances have allowed for the
low-cost entry of competitors and new trading systems. Empowered
institutions have demanded that systems accommodate their trading
needs. These items have resulted in reductions in Nasdaq members'
Following the Electronic Communication Networks rules started
earlier this year, quoted spreads on affected Nasdaq stocks
declined by about a third. This in part has prompted some firms
to stop making markets in smaller Nasdaq stocks. The ECN rules
have also allowed customer limit orders on Nasdaq stocks to
begin competing with Market Maker quotes. This has led some
to predict that Nasdaq will leave its quote driven roots and
become an order-driven market like the NYSE. Will this occur?
If so, is it the first step in the evolution of U.S. stock markets
toward a single order-driven market?
The secondary market is not the only market affected by the
reforms. I recently heard an investment banker lament that gross
spreads on junk bond initial public offerings (IPOs) had declined
from 200-300 basis points two years ago, to 80-90 basis points
today. Obviously, the reduction in gross spreads in both primary
and secondary markets will focus attention on the costs necessary
to provide these services.
Will increased cost consciousness cause firms to turn to computers
instead of people to execute trades? After all computers don't
get bonuses. Is the quote driven market about to become extinct?
If so, who will assist firms in capital formation? Since many
times the firm that takes a company public makes a secondary
market in the stock, will the pull back in market-making activities
have an impact on capital formation, or will non-traditional
firms step in and service market niches?
Paul, can you give us a brief overview of the different types
of market structures in existence today?
I'll say a few words on market structures and their developments
in Europe. Let me begin by making the distinction between the
primary and the secondary markets. In the primary markets there
are European minimum requirements for prospectuses, but there
are wide differences in practice. One area where this is visible
is liability of intermediaries and of issuers in the case of
The procedures for initial public offerings, as well as secondary
offerings, often use the bookbuilding method in many European
markets. The main problem seems to be the system or the lack
of it under which the leading banks distribute allocations of
shares in the case of massive over-subscriptions. However, there
are very few exchanges that still have formal rules on primary
market distribution. They leave that to market forces.
De Jure, there is no official recognition of prospectuses in
Europe. A broad degree of internationalization has been reached
and major primary offerings are, de facto at least, made in
a number of markets at the same time, basically through large
banks that have offices in most markets.
As far as the secondary markets' structures are concerned,
the London Stock Exchange is (at least until October of this
year), the main exception. Most other markets have moved towards
order driven approaches whereas London, until the new system—the
Stock Exchange Electronic Trading Service (SETS)—is put into
practice, still has a Market Maker-based system like Nasdaq
has. The Scandinavian Exchanges all work with electronic limit
order books and so does Paris. They have no more agents within
the book. Paris is quite successful selling its system to others.
Both Frankfurt and Amsterdam have electronic markets, but with
important quote-driven elements through the Kursmakler and the
Hoekman. Amsterdam's trading system will be evaluated and reformed
quite soon, probably in the direction of even more order-driven
Many of the markets are toying with the idea of inserting an
"electronic call market auction" during the continuous
trading day. Some already have introduced this phenomenon.
All markets are open to remote membership from other markets
but, regrettably, not from the United States. This is not due
to protectionism at our side of the ocean, but by the U.S. SEC.
In your opinion is any one of them better at facilitating capital
formation? Do you envision that this will evolve into a type
of global borderless primary market for capital?
I think it is fair to say that the capital formation process
in Europe is undergoing tremendous change. Currently, Continental
Europe lags with respect to the Anglo Saxon markets. However,
an equity culture is starting to flourish. The big pension funds
in the United Kingdom and certainly in the Netherlands move
towards a portfolio mix much less biased towards bonds and with
a higher percentage invested in national and international equities.
Furthermore, companies, both small and middle sized, are to
a much greater extent looking toward the market for their financing
and many more requests for listing are being received by the
exchange markets in Europe.
I should add here that for companies desiring listing, the
structures of the primary and secondary markets are hardly a
consideration, except for the reputation of the market and its
Internationalization is spreading rapidly. There is quite visibly
still a proximity bias in investments in portfolios in Europe.
What impact would this have on Nasdaq, which has a long history
of helping firms acquire the capital they need for growth?
We have seen in quite a number of markets, dual listings between
Nasdaq and the domestic market. In most cases, after an initial
flurry of activities on Nasdaq, the home market brings the best
The European Union (EU) should make it easier for European firms
to raise capital cross-border. Can we expect increased competition
or cooperation between exchanges in the future?
A new element in the relations between markets in Europe definitely
is competition. Markets now realize that intermediaries and
investors may walk away from them, and even listed companies
can. Therefore, there is increased emphasis on trading structures,
costs, spreads and much less immediacy like quote-driven markets.
There is an interesting panoply of forms of cooperation between
existing markets, regardless of whether or not it is the Scandinavians,
the Benelux, the European New Market (EURO NM), Eurex or the
cooperation of Amsterdam with Financial Times/Stock Exchange
100 (FTSE) in bringing out new indices.
The drive for harmonization of regulation is very different
today. Regulation in Europe is coming from the markets and regulators
often find themselves following events instead of leading them.
The Paris Bourse is an order-driven market and yet, the Le Nouveau
Marché was set up as a core market with a call market
feature built in. What prompted Paris Bourse to start Le Nouveau
The answer is quite simple. There was a need. The existing exchange
listed more companies with generally strong track records. We
had, at that time, a lot of companies that were younger, maybe
more risky. Those companies were looking to raise money, but
did not have any exchange in which to do it. We also had venture
capital firms that were looking for an exit for their investments.
That is what we did by creating a new exchange, purely dedicated
to high-growth companies. This exchange has been designed with
the Nasdaq model in mind.
How successful has Le Nouveau Marché been?
We consider that Le Nouveau Marché is a big success in
Paris. This market is now 18 months old. It has attracted 32
companies and three of them are now dual-listed with Nasdaq,
and one with the Toronto Stock Exchange. Those companies have
raised $500 million of new capital and they account for a total
market cap of U.S. $2 billion. As far as performance is concerned,
if you had put $100 in a portfolio of Le Nouveau Marché
stocks, your investment would have been increased by $36 by
January 1st of this year.
Last, but not least, is liquidity. With the combination of
these two systems, quote driven and order driven, we are able
to make 900 trades per day, representing U.S. $6 million on