Two years ago, finance executives at Cadence Design Systems Inc. had to decide whether Cadence should continue to list on the New York Stock Exchange (NYSE) and the Nasdaq or throw its full weight behind just one. James Haddad, Cadence's corporate vice president of finance, quantified differences in technology, trading speeds, cost to the company, cost of trades to the investor, reliability and confidentiality. Nasdaq, with its stealth electronic trading system, came out on top. Today, Cadence is considering giving that decision a rethink–at least if the NYSE, already the largest global exchange, gets any more global. "If the NYSE consolidates faster as far as a global footprint, we might revisit where we are listed," Haddad says. "It's our responsibility to revisit our choices periodically and make sure we are getting the same benefits."
This is hardly a concession on Haddad's part; the global nature of exchanges wasn't a factor when Cadence cut ties with the NYSE. But, the entire world of equity exchanges is being transformed–from dozens of parochial exchanges scattered around the global to a world of giants looking to grab more turf. "Everyone is is talking to everyone else," says Nelson Chai, NYSE Euronext CFO. "Ultimately, there will be just a few global exchanges."
In this evolution, bourses are consolidating, automating and converting to public companies. "The silos are breaking down," says Rajiv Shah, head of A.T. Kearney's North American Financial practice. "As cross-border alliances mature and achieve economies of scale you will see lower costs, better service, better products and better access."
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The ideal for any big players must be to become the first truly global, truly 24-hour exchange with superior electronic technology that allows seamless trading anywhere and in as many currencies as are relevant. The goal: create deep pools of liquidity and more fluidity, while cutting risk. "As markets become more global there is less of a risk from dramatic downturns that come from low liquidity and, as a result, some of the gyrations will be smoothed out," says Eric Cohen, co-chairman of law firm Bryan Cave LLP's corporation finance group. Certainly, no listing company would complain about that outcome.
Farthest along is NYSE Euronext, which is trading in dollars out of New York, euros out of Paris and, through a partnership with the Tokyo Stock Exchange, yen out of Tokyo. But, since the companies operate in their own time zones, the jarring starts and stops of the opening and closing bells remain. Currently, the squabbling over the London Stock Exchange (LSE) and the Nordic Exchange OMX involving the Nasdaq and even a dark horse bid from the cash-rich Dubai Stock Exchange shows others share the NYSE's aspirations.
What does all this mean to multinational corporations that already have access to foreign capital through subsidiaries and foreign listings? Worldwide exchanges will offer companies with IPOs or secondary offerings an almost bottomless pool of money and access to investors living everywhere from Ukraine to Uruguay. "It will increase your options," says Hans R. Stoll, professor of finance and director of the financial markets research center at the Owen Graduate School of Management at Vanderbilt University. "If money is tight or interest rates high here, the opportunity to go somewhere else can be appealing," he says.
But before a universal exchange can become a reality, countries must agree on global financial reporting, technology and regulatory standards. Without consensus, the universal exchange is just a dream, says Ryan LaFond, an assistant professor at Massachusetts Institute of Technology's Sloan School of Management. "We don't have a global enforcer, so how can we have a global exchange?" he asks. "Who will be in charge of managing simple things, like short-selling: Will it be handled based on where the exchange is or where the company is domiciled?"
At least, progress is being made on the standards front. The field has narrowed to the rules-based U.S. Generally Accepting Accounting Policies (GAAP) and the principles-based International Financial Reporting Standards (IFRS), with IFRS in the lead. It's the protocol in more than 100 countries, and even the Securities and Exchange Commission is looking into the feasibility of U.S. companies adopting IFRS. Without global harmony, says Bruce Pounder, a consultant and president of Leveraged Logic: "It's like the Tower of Babel. Nobody is speaking the same language."
Finding efficient global technology is also key. Here, Nasdaq, which has struggled recently in bids for the LSE and OMX, has an advantage given a history of sophisticated electronic trading. "Underneath it all," says Nasdaq CFO David Warren, "you have to consider how effective exchanges are at using technology to drive synergies and performance."
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