Fool's Eye View

[ May 3, 2000 ]

iX -- Step One?

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- After constant press speculation, the actual announcement of the merger between the London Stock Exchange and the Deutsche Bourse was made this morning. As expected the new venture will be jointly held by the two organisations. It will also have a suitable techie-like name, iX, shorthand for international exchange. The merger is expected to be completed this autumn. So what are the main proposals and what will it mean for the likes of you and I?

The basic premise is quite simple. iX will eventually allow trading in all European shares. Although the initial merger is between London and Frankfurt discussions are also taking place with the Milan and Madrid exchanges. Others are expected to follow. In addition a separate joint venture has been agreed between iX and Nasdaq which will allow trading in both major US and non-US shares on a second exchange. In essence this will be the first global stock exchange and it is this part of the announcement which is perhaps the most significant as far as investors are concerned.

London and Frankfurt already account for 53% of the volume of shares traded in Europe, and 45% of the top 300 companies in Europe are listed on their exchanges at the moment. Nasdaq had previously planned to launch a European exchange by themselves. The fact that they are joining forces with London and Frankfurt bodes well for the success of this venture. It is a big vote of confidence. The trading facilities will be provided by Frankfurt's Xetra system. London's SETS system appears to have paid the price for its recent failures.

As private investors we will have access to more shares, with smaller spreads between buying and selling prices and lower transaction costs due the greater number of shares traded. This is a financial supermarket compared with the corner shop exchanges that investors currently have to deal with. But some issues remain somewhat hazy. For example, iX has said that blue chips will be listed in London whilst tech stocks will reside in Frankfurt on the Nasdaq-iX exchange. It appears that this means that FTSE 100 stocks will be on a new London exchange whilst techMARK stocks will move to Frankfurt. Other non-tech shares from FTSE 250, Smallcap and Fledging indices will remain where they are. So these changes will not affect the vast majority of shares valued under £4b. If anything this will widen the gulf, perceived or otherwise, between the so-called new and old economies. A wholesale move of all stocks to one market would be much more preferable, rather than the halfway house that this appears to be.

What implications will the proposals have for stamp duty? In the UK we pay 0.5% on share purchases but our German Fools tell me there is no stamp duty in their country. So will we still have to pay stamp duty or do the proposals provide a method of circumventing this tax?

iX also said that eventually all shares would be traded in Euros. although for UK stocks this would be dependent on investors' wishes. Trading in domestic currencies will remain for the time being, but it seems likely that there will be pressure from Europe for trading in euros sooner rather than later. Presumably whilst the UK remains out of this currency this will create some additional complications for investors.

Overall the announcement has left me with more questions than answers. It is undoubtedly a step in the right direction. Let's just hope it is the first of many steps. The London Stock Exchnage's new chairman, Don Cruickshank, says that is the case. We will have to wait and see.

Related Links

• London Stock Exchange
• Deutsche Bourse
• Nasdaq

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