EURONEXT, the first pan-European Exchange

Created in September 2000 by the merger of the Amsterdam, Brussels and Paris markets, Euronext is one of the world’s newest exchanges and the first pan-European exchange. Its 2002 acquisition of the London International Financial Futures and Options Exchange (LIFFE) signaled the direction that other exchanges may follow: cross-border markets with multiple products seamlessly traded on a single platform.

In 2004 Euronext completed the integration of all its markets—including the Lisbon bourse that was acquired in 2001—and may be ready for another acquisition: the prestigious London Stock Exchange (LSE).

Mergers between exchanges in different countries raise many challenges. But an important piece of the puzzle in a possible Euronext-LSE merger is already in place. LCH.Clearnet, which resulted from the 2003 merger of Euronext’s Clearnet and the London Clearing House (LCH), already clears products for both Euronext and the LSE.

Euronext has created a single market for cash products by making all its listed stocks available on a single trading platform, NSC, and clearing through a single system. Euronext.liffe achieved a similar model for derivatives, by bringing all its derivatives products on a single electronic trading platform, LIFFE CONNECT.

Such ground-breaking innovations are nothing new for the exchanges that are now part of Euronext, as they contributed to the development of capital markets six centuries ago.

Euronext Amsterdam
Amsterdam became an important financial center soon after seven Dutch provinces united and declared independence from Spain in 1579.

A goods and financial exchange, the Amsterdam Bourse brought a number of innovations, such as the listing of insurance policies covering risky ocean trade, which was expanding to the far shores of the New World. Banking, no longer dominated by the Italians who had suffered several bankruptcies, flourished in Amsterdam in tandem with the stock exchange.

Another innovation was the foundation of the Dutch East India Company or VOC in 1602 and the first organized issuance of shares by a company. For this reason, Amsterdam is regarded as the first true equities exchange, in contrast with its predecessors that traded various securities. Investors’ appetite for the VOC shares pushed the stock up 12 fold and helped create options and futures on the coveted stock, thus laying the foundation for Amsterdam as a derivatives market.

Amsterdam’s trading success also brought the first major market bubble with the famed “tulip mania” of 1634 and its ensuing crash in 1637.

In modern times, the Amsterdam Stock Exchange Association was founded in 1851 to regulate stock trading. It required membership to trade on its floor. In 1997, the Association abandoned its membership model and merged with the European Options Exchange, launched in 1978 to emulate the Chicago Board Options Exchange.

The new company, Amsterdam Exchanges, operated both equity and derivatives markets and consolidated clearing, settlement and depository services. The new structure paved the way for the Euronext merger.

Euronext Brussels
Belgium was the cradle of the first securities markets, starting with Bruges, due to Flanders’ prominent role in international trading in the Middle Ages. The Antwerp Stock Exchange was the world’s first building specifically erected to house securities trading in 1531.

Over the centuries, Belgium’s financial center moved to Brussels after Napoleon, who had conquered France’s northern neighbor, issued a decree creating the Bourse de Fonds Publics de Bruxelles in 1801.

Although Belgium gained its independence in 1831, the country’s financial system retained the French model: brokers were officials controlling government securities trading and could not engage in proprietary trading. Belgium’s financial industry was deregulated in 1867 and another milestone was achieved a century later with the Financial Transactions and Markets Act of 1990 to modernize the country’s capital markets.

In 1999, a royal decree created the Brussels Exchanges (BXS), a corporation operating the Bourse de Bruxelles, the Belgian Futures and Options Exchange or Belfox, and the central securities depository or CIK. It was a crucial step toward the Euronext merger a year later.

Euronext.liffe
The lifting of foreign exchange controls in Britain led to the creation of the London International Financial Futures and Options Exchange (LIFFE) in 1982 to help investors manage currency and interest rate volatility.

Through the acquisition of the London Traded Options Market (LTOM) in 1992 and of the London Commodity Exchange (LCE) in 1996, LIFFE added equity derivatives and commodities. A pit-based exchange, LIFFE started developing electronic trading in 1998 but it was too late to stem the onslaught of its young virtual competitor, Eurex, which snatched trading in flagship German bund contracts away from London.

By June 2000, the derivatives exchange was trading all its products on the LIFFE CONNECT platform. It changed its corporate structure to become a for-profit entity. Euronext bought the derivatives market in 2002.

Euronext Lisbon
A European seaborne power along with Spain, Portugal’s involvement in the conquest of the New World was limited by its small population of just one million at the beginning of the Renaissance.

Nevertheless, Portugal was geared toward international trade and a group of local merchants, the Businessmen’s Assembly, created the Lisbon Exchange in 1769. The Porto Stock Exchange followed nearly a century later.

In 1992, the Lisbon Stock Exchange Association and the Porto Stock Exchange Association were organized as non-profit institutions, with cash transactions handled by Lisbon and derivatives by Porto. They merged in 1999 and were acquired by Euronext in 2002.

Euronext Paris
Before the Dutch East India Company started issuing shares, there had been several attempts at raising funds to finance business development throughout Europe.

One early example was the Societe des Moulins du Bazacle [Bazacle Mills Co.] that floated 96 shares in 1250 in Toulouse, France. The stock remained quoted under another name until 1946.

Emulating trade centers in Bruges and Antwerp, Lyons created the first French bourse in 1540. The French were eager to regulate securities trading early on, with a royal edict governing financial intermediaries being issued in 1572. But Paris, the capital, did not have a bourse until 1684, highlighting Frenchmen’s traditional distrust for financial instruments.

John Law, a Scottish adviser to the King, confirmed their worst fears when he introduced paper money issued by the Banque Royale in 1716 and floated shares in the Compagnie des Indes—two experiments that ended in bankruptcies and gave “bank” a bad name in France.

Paris’ first stock exchange was created in 1724 but the French financial system remained anemic until Napoleon created a central bank, issued banknotes, regulated brokers and opened a new Paris Bourse in 1801. Always eager to clearly assign duties, the French can be credited for inventing the upstairs market and the over-the-counter market, nicknamed the “wet feet” because its brokers convened in open air, no matter the weather.

Paris moved into derivatives in 1986 with the MATIF bond futures market and the MONEP equity options exchange. All French markets, which had joined the electronic trading revolution early on, merged in 1999 as ParisBourse. The next year, the new company merged with the Amsterdam and Brussels bourses to create Euronext, which went public the following year.

EUREX, the world’s largest derivatives exchange

Deutsche Borse’s best success story might be Eurex, the world’s largest derivatives market, which it co-owns with the SWX Group.

In 1997, Deutsche Borse and SWX Swiss Exchange agreed to merge their respective derivatives subsidiaries, DTB (German Futures and Options Exchange) and SOFFEX (Swiss Options and Financial Futures Exchange) and move their operations to a new electronic trading and clearing platform.

The success of Eurex’s electronic format was dazzling. By 1999, Eurex had vaulted to the top position among the world’s derivatives exchanges, snatching trading in highly liquid German bund futures away from the London International Financial Futures and Options Exchange (LIFFE). The following year, Eurex Clearing AG, the world’s largest clearing house, became the first market to offer remote electronic clearing.

Eurex rapidly expanded its line of products and started developing transatlantic ambitions. In March 1998, Eurex announced an alliance with the Chicago Board of Trade (CBOT). In Europe, a similar alliance was formed with HEX, the Finnish exchange.

The CBOT alliance ended sooner than anticipated, when the Chicago exchange announced in 2002 that it was ditching Eurex’s a/c/e/ platform for functionality-loaded LIFFE CONNECT.

In a counter move, Eurex partnered with the Clearing Corp. in the United States to create Global Clearing Link. Eurex US was launched in February 2004 but its take-off has been slower than expected.

The Royal Exchange, the first securities market in London, dates back to 1566 when it was created to compete with Amsterdam.

In 1698, rowdy brokers—mostly “jobbers” or speculative traders—were expelled from the Royal Exchange, which inspired Jonathan Castaing to issue a list of securities and commodities prices, “The Course of the Exchange,” to lure that clientele to his coffee shop on Exchange Alley.

The “jobbers” were particularly active in shares of the South Sea Company, a speculative bubble that burst at about the same time as John Law’s Mississippi Bubble in France in the early 1720s.

Yet, the clientele remained faithful to Castaing’s and set up a brokers’ club there in 1761. The crowd grew so big that, eight years later, the brokers moved to their own building, complete with its own coffee house. The grouping took the name of “Stock Exchange” in 1773, introduced membership to the “Stock Subscription Room” in 1801, and wrote a rulebook in 1812.

London owed its rise to prominence as a European market center to the closure of the bourse in Paris during the Revolution and the occupation of Amsterdam by the French. The industrial revolution, in particular the railway mania of the 1840s, presided over London’s good fortunes.

Increasing trade within the British Empire, as well as technology advances such as the telephone and telegraph, further contributed to London’s expansion in the 19th century as an international market. The two world wars of the 20th century diminished London’s global prestige, while Wall Street and Tokyo grew in importance.

In 1986, the “Big Bang” deregulation set the stage for the modernization of trading, including electronic trading. The new structure was renamed the London Stock Exchange in 1991 and later launched the emerging-market AIM, the SETS trading system, and the CREST settlement service. In 2000, shareholders voted to incorporate London Stock Exchange plc (LSE) as a limited company, which listed on its own Main Market the following year.

In 2003, the LSE creates EDX London, a new international equity derivatives business, in partnership with OM Group.

One of the world’s oldest equity market, the LSE is about to reinvent itself as it mulls a merger, possibly with Euronext N.V. The LSE said in March it “remains willing to continue discussions with Euronext.” It is the second time in five years the LSE is considering a merger with one of its European rivals.

SWX SWISS EXCHANGE – The home for warrants

Switzerland, where banking prospered, developed stock exchanges much later than other European countries, with Zurich becoming a market center in the 19th century.

However, brokers associations long predated the creation of organized exchanges. The Zurich “Sensale” Ordinance of 1663 provided some control over “sensale,” an association of merchants and financial intermediaries.

The system remained essentially in place until 1848, when a new federal constitution took effect in Switzerland. The need for an organized market was becoming increasingly pressing, given the competition among European exchanges. For instance, Geneva already had an exchange since 1850.

At first, trading in Zurich was held only on Fridays beginning in 1855, hence the name of “Freitagsborse,” or Friday bourse. The plan to build an exchange in Zurich, tentatively called the “Committee for the Official Bills of Exchange and Securities Quote List of Zurich,” was drafted in 1873.

Four years later, the Zurich Stock Exchange Association made its debut. Its development was hampered by a quarrel between the local authorities who wanted to tax trading and the brokers who brought trading to a standstill with a protracted strike. The Zurich market got a boost when banks were admitted as members in 1896 but faced some hectic times due to speculation in Swiss railroad stocks. In the 1930s, Germany’s financial crisis as a consequence of World War I, the collapse of a major bank and the devaluation of the British pound were all events that rocked the Zurich bourse.

Zurich became Europe’s largest warrant market in the 1990s, closed its floor and pioneered trading technology with the goal of becoming an international marketplace. Since 2002, SWX Group, wholly-owned by the Association SWX Swiss Exchange, is the holding company for the renamed SWX Swiss Exchange and other subsidiaries, including virt-x, a pan-European electronic stock exchange.

Its major “coup” is its partnership with Deutsche Borse in Eurex, the world’s largest derivatives exchange.

BORSA ITALIA – Growth via remote membership

Although Italian bankers played a crucial role in the birth of exchanges, Italy did not develop its own capital markets until much later.

After annexing most of northern Italy, the French Emperor Napoleon created the Milan Stock Exchange in 1808, using the same regulatory framework that he had drafted for the French market.

At first, the Milan exchange traded securities and commodities and did not get its first corporate listing—a railroad company—until 1859. Other regional exchanges flourished throughout Italy, which became a unified nation in 1861.

Genoa, a major port, was the main Italian financial market in the 19th century, but Milan took the lead after World War I. The fascist regime imposed a tight control on the economy and stifled capital markets.

It was not until the 1980s that Italian markets got a boost from the introduction of mutual funds. Milan firmly established itself as the leading Italian market with 99 percent of overall volume, although nine other regional exchanges struggled to survive for as long as the open-outcry auction system lasted.

But broad market reforms ushered in a national computerized order-driven trading system in 1991 and Italy’s privatization program in the late 1990s paved the way for modern equity markets.

To manage this new challenge, the Milan Stock Exchange privatized and became the Borsa Italiana Group, launched in 1998 to run and regulate trading as well as oversee corporate disclosure. To attract liquidity, Borsa Italiana introduced remote membership, which has allowed about 130 domestic and foreign brokers to participate in Italian markets.

Borsa Italian regulates and manages the stock exchange market, along with the Italian equity derivatives market (IDEM) and the Italian interest rate derivatives market (MIF).

BIt Systems, the technology arm of Borsa Italiana, provides the IT infrastructure for the exchange and offers trading services to the financial community. Cassa di Compensazione e Garanzia or CC&G acts as central counterparty and Monte Titoli is the Italian Central Securities Depository and Settlement whose operations are highly automated.

SPANISH EXCHANGES – United under one roof

The first exchanges in Spain were commodities markets known as Lonjas.
Although Spain did not have a stock market then, it was a Spaniard, Jose de la Vega, who wrote the first book on exchange trading, called “Confusion de Confusions,” in 1688 in Amsterdam.

It was not until 1831 that the King of Spain created the first Madrid Stock Exchange. Although other regional bourses emerged, Spanish capital markets did not flourish until the later part of the 20th century after the death of General Franco.

Spain adopted a new constitution in 1978, which created a more favorable framework for investments. In July 1989, the Spanish Securities Market Act took effect, paving the way for broad reforms.
Open-outcry was abandoned in 1995, with the four exchanges in Madrid, Barcelona, Bilbao and Valencia trading on the same electronic platform.

In 2003, Bolsas y Mercados Espanoles or BME Group integrated the four bourses, as well as MF Mercados Financieros or MEFF, Iberclear and BME Consulting.

OMX – A unified Nordic-Baltic market

As the owner of the Stockholm Stock Exchange, OMX could initially trace its roots to 1863. With its recent acquisition of the Copenhagen Stock Exchange (CSE), OMX can now go further back in time. The Danish exchange was built in 1619 and is today the world’s oldest surviving exchange building.

Its spire is formed by the entwined tails of three dragons representing Denmark, Norway and Sweden—a fitting symbol for OMX, the global IT firm that operates six Nordic and Baltic markets.

OMX resulted from the 2003 merger of OM’s Stockholm Stock Exchange and HEX, which owned the exchanges of Finland, Estonia and Latvia. The new company took the name of OMX and soon went public. OMX has since acquired the Lithuanian exchange and the CSE, with the Polish market now said to be a potential target.

The Swedish group is a partner in the NOREX alliance, formed in 1999 between the exchanges in Copenhagen and Stockholm as the first cross-border market supported by a single platform, OM’s SAXESS, with uniform rules.

Today, there are eight members in the NOREX alliance: the six OMX exchanges plus Norway’s Oslo Bors and the Iceland Stock Exchange. All NOREX alliance exchanges trade on SAXESS.

OM’s strategy has always been bold: the company made headlines in 2000 when it bid for the London Stock Exchange to counter Deutsche Borse’s offer. Neither won, but OM pursued its vision of a deep Nordic-Baltic pool of liquidity, whose capitalization rivals the one of the stock exchanges in Switzerland, Italy and Spain combined.

OMX also is the third largest European stock exchange for equity options trading and partnered with the LSE to create the EDX derivatives exchange.