MIS 3090:IT for Financial Services

Global Markets

2/15April 21, 2023

OutlineOutline

Europe’s financial markets Development of a pan-European market OM ~ Swedish firm at the vanguard of IT innovation Nordic and Swiss Exchanges (innovations) EASDAQ (later became NASDAQ Europe) Settlement Conclusion

3/15April 21, 2023

European Markets European Markets

Economic Monetary Union ~ quasi-fixed exchange rates (1979)

Fragmented markets – a matter of national pride Expensive way to raise capital

– Resort to bank borrowing, private equity placing

Slow development of an equity culture (26 equity markets)– State owned companies sold off: British Airways, BP, BT

1999: NASDAQ sought to launch a pan-European equity mkt.– 24-hour continuous trading (linked with U.S. and Japanese markets)

Tradepoint, Jiway (U.K.-based electronic markets: ECNs) ceased ops.

Neuer Market: electronic market operated by Deutsche Boerse Traditional markets reacting: London, Frankfurt, Paris

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Pan-European Markets Pan-European Markets 1999: London, Frankfurt, Paris, Amsterdam, Brussels, Madrid,

Milan and Zurich announce plans for a unified equity market – Common rules / regulations, share systems, common trading hours– This would operate as a “virtual market” by linking all systems – Plan collapsed due to lack of agreement on a common system (Xetra)

Paris, Amsterdam and Brussels decide to merge into Euro-next– Paris: blue-chip firms (BNP: banking; Heineken: beer; Peugeot: cars)– Amsterdam: derivatives, futures, options– Brussels: small and medium size companies– Common trading systems based on NSC (used at Paris Bourse)– Merged with Portuguese market, bought London (LIFFE)– Approx 1,333 listed companies (at end of 2004)

Merged with NYSE in 6-2006 – to be called NYSE Euronext

click to connect

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OMX (Swedish-based) OMX (Swedish-based) Own / operate exchanges (for profit), provide IT solutions Expertise in marketplace, clearing and settlement systems OM created Stockholm Automated Exchange (SAX)

– Order-driven electronic trading system (SAXESS)– Multicasting: transactions sent to all workstations– SAXESS system (see description in this article)

OM Technology solutions

Failed to take over LSE in 2006

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Nordic ExchangeNordic Exchange Virtual market formed by Nordic (Denmark, Iceland, Finland

Sweden, Norway) and Baltic (Estonia, Latvia) exchanges− Includes all OMX exchanges

Market trades in equities, bonds and derivatives Not part of the Euro zone but can trade in Euros 916 listed companies at the end of 2004 Knight Trading (NASDAQ’s largest market maker)

– Opening a pan-European market with 19 brokers– There is little to stop other market makers or

exchanges from opening in Europe – barriers to entry are high but not insurmountable

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Europe’s NASDAQ (EASDAQ)Europe’s NASDAQ (EASDAQ) Formed in 1996 – closed 2003 Run on NASDAQ-like principles and systems Aims

– Remove problems associated with cross-border trading– Provide dual trading mechanism with NASDAQ (trans Atlantic)– Access to capital for bio-tech, info-tech and growth industries

Regulated: Belgium Commission for Banking & Finance– SEC seal of approval

TRAX system matches bids and offers in real time– Settlement information sent to Intersettle (paperless settlement system

operated by a series of Swiss banks – based in Zurich)– Direct link means settlement is on a T+3 basis

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European Trading SystemEuropean Trading System (ETS interface)(ETS interface)

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Switzerland ~ Financial HubSwitzerland ~ Financial Hub 40% of global cross-border asset management for private

clients takes place here Seventh largest stock market (SWX) Global leader in electronic trading and settlement

– 1996: launched electronic trading system (stocks, bonds, derivatives) Efficient clearing and settlement system 2001: SWX and Tradepoint launch Virt-x

– Pan-European blue chip electronic market 1998: formed Eurex with Deutsche Boerse

– Subsumed German Futures and Options Exchange– World’s largest derivative exchange (options/futures)– 2002: merging with MATIF and MONEP (France’s derivative markets)

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VIRT- X VIRT- X (the cross-border exchange)(the cross-border exchange)

Provides direct, real-time access to trading in the constituents of all the major pan-European blue chip indices, facilitating sector and index trading

– AEX, CAC40, DAX30, DJ EuroStoxx 50, DJ Stoxx 50, FTSE Eurotop 100, FTSE 100, MIB30 and SMI

Trading model encompasses a continuous electronic public limit order book with opening, intra-day and closing single price auctions and full anonymity; can support liquidity providers and off book and block trading requirements

A single clearing and settlement model supporting STP from trade to settlement; uses SWX trading platform

Supervised by the Financial Services Authority in UK

click here to view today’s trades

click to connect

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EUREXEUREX Trades derivatives on Euro and US-based equities/indices

– Blue chip German, Swiss, Finnish, European and global indexes including Dow Jones (EURO) STOXX 50 and DAX, the benchmark index of Deutsche Börse

– Also offers market sector index derivatives based on the Dow Jones STOXX 600 and Dow Jones EURO STOXX Indexes.

– Futures and options on sectors such as banking & energy– Alliance with Chicago Board of Trade (CBOT)

Operated by Deutsche Börse and SWX Swiss Exchange Trading participants connect to EUREX via a private

communications network– 700 locations worldwide are connected to EUREX at present

click me

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EUREX USEUREX US Eurex web site

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Settlement Systems (T+?)Settlement Systems (T+?) SEC wants to move from T+3 to T+1 Reduce market, credit, operational, and systematic risk Bank of Japan: deployed Real Time Gross Settlement (RTGS)

system for bond trading– Offers intra-day settlement (more like T+1)

Singapore and Hong Kong moving to T+1 U.S.:Systems implications (process is more important)

– Exception resolution (late cycle intervention)– Build bridges to settlement and banking systems – You cannot talk about T+1 unless you have STP– Active involvement by Securities Industry Assoc. (SIA)

Omgeo (A Company Involved in STP Technology)

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ConclusionConclusion European markets – not yet fully integrated

– Euro-next (stocks, bonds and derivatives) – EASDAQ no longer in existence– Nordic and Baltic exchanges (NOREX) – Virt-x (equivalent of ECN)– Eurex (derivatives only)– Traditional physical markets still exist (LSE)

Desire exists for a single integrated electronic market – Barriers: political, economic issues (technology less a problem)– 26 equity markets: single Euro zone market will happen but then

Sterling (UK) has opted out for the moment (Denmark, Sweden also)

– Move towards STP: harmonize regulations (single order book) Settlement day: intra-day maybe but why not stay with T+1?

15/15April 21, 2023

For Next Class…For Next Class… Read

– Online articles on Sarbanes-Oxley listed on the class website– Turn in answers to Shenzhen Exchange case questions