June 27, 2002

NOTE TO EDITORS

Enclosed for your review is the latest edition of the Federal Reserve Bank of New York's Current Issues in Economics and Finance, The Consolidation of European Stock Exchanges.

With the growing popularity of cross-border trading in Europe, more and more stock exchanges there are now viewing consolidation as a way to expand their operations across national borders. Yet it may be some time before the full benefits of consolidation are realized by Europe’s financial markets, according to authors James McAndrews and Chris Stefanadis.

The authors explain that the emergence of the euro and a wider acceptance of equity as a financing tool are encouraging European investors to engage in more cross-border transactions. However, despite the allure of these transactions, most stock exchanges in Europe are national institutions that trade only local, country-specific stocks.

This market structure appears to be changing, though, as a rising number of exchanges are attempting to operate beyond their home country. McAndrews and Stefanadis note that several efforts are under way to create, through mergers or other consolidations, pan-European exchanges that offer trading in stocks from many European countries.

McAndrews and Stefanadis observe that, on the one hand, the establishment of pan-European exchanges can lead to important benefits for Europe’s financial markets. They point to standardized trading platforms across exchanges, increased market liquidity, and reduced market fragmentation--potential by-products of exchange consolidation--as developments that could minimize the costs and complications associated with cross-border trading.

On the other hand, the authors suggest that a large-scale consolidation of Europe’s stock exchanges is far from becoming a reality. They identify a variety of barriers to consolidation, such as potential investor resistance, clearing and settlement inefficiencies, regulatory disparities, and differences in listing requirements between exchanges. Accordingly, while McAndrews and Stefanadis acknowledge that it is too early to predict the exact structure or timing of the new European stock markets, "these barriers all suggest that investors and companies in Europe will reap the benefits of financial market integration only gradually."

James McAndrews is a vice president and Chris Stefanadis an economist in the Federal Reserve Bank of New York’s payments studies area.

Contact: Linda Ricci
(212) 720-6143