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This article considers the current changes taking place in the world of stock exchanges and how they impact listed issuers. It also suggests that the changes may not be going far enough, for now anyway.
The breaking up of central markets
Stock exchanges have come a long way in the few hundred years of their recognisable existence. Just as the crowds of capital raisers, brokers and investors moved in the 1800’s from the random coffee houses and street corners of the main cities into organised markets under one roof, now in the early years of the 21st century these same populations are leaving central markets and resuming their previous haunts in the electronic ‘coffee houses’ and corners of the internet highway.
The latest piece of the jigsaw to drop into place is driven, oddly enough, by European regulation. Even before the official enactment of the Markets in Financial Instruments Directive, MiFID, has been seen as the catalyst for the crystallisation of a strategy that has been in the melting pot for a while. The most obvious sign of this in Europe is the emergence of a number of new trading platforms which will have a high degree of equality with the existing formal stock exchanges.
These ‘Multilateral Trading Facilities’ (MTFs) will enable high volumes of client orders to be executed against matching orders from other investors, hedge funds or the brokers themselves. And providing the cost to the clients is the best obtainable, it is perfectly OK.
So the business of stock trading has moved on from the situation where the stock exchanges acted as the natural ‘pinch-point’ in the value chain – which was, for example, the obvious stage for checking that investors got a fair deal in exchanging their money for somebody else’s securities.
In recent years, stock exchanges have surrendered many of the services that they traditionally supplied to the markets they were set up to serve. For example, their settlement services have been ceded to external settlement providers; and responsibility for policing the credit risk and good behaviour of their erstwhile members, and above all the role, meaning and status of ‘Competent Authority’, have moved to external regulators.
As a result, despite retaining the descriptive term ‘stock exchanges’, the current breed are very different animals.
Impact on issuers
There were always three distinct populations of stakeholder in stock exchanges: intermediaries (who were brokers, jobbers/specialists etc); investors; and issuers. Of the three, it seems that issuers are the stakeholders to whom these changes bring the greatest confusion.
Arguably, these changes are being made in the name of intermediaries and their clients, the investors. The stated benefits are lower costs of trading, narrower spreads, and greater liquidity. These offer clear attractions to intermediaries and clients, and this is where the balance of benefit is primarily focused.
Typically, issuers access capital when they need it. They have to accept the liquidity, spreads and overall mood of the market as they happen to be at that time, subject to some direction from advisors. At other times, the relationship between listed issuer and stock market is confined to the obligations imposed by the listing regulators in terms of disclosures to the market and observance of codes of behaviour.
In addition to multiplying in numbers, stock exchanges are now locked in cross-border struggles to link up, either formally or via strategic alliances. The NYSE-Euronext merger and the various abortive assaults on the London Stock Exchange are the most prominent examples of this.
The case of NYSE-Euronext is of particular interest as an example of the listed issuer’s dilemma resulting from these mergers. With the US stock exchange being grouped in the same corporate structure as the French, Belgian, Dutch and Portuguese exchanges, what is the message for their indigenous listed companies?
The answer lies in understanding what issuers need from stock exchanges. Issuers fall into two distinct camps – those with only one listing and those with multiple listings.
A single listing offers an issuer the simplicity of having to comply with one set of rules, one reporting obligation and the requirements of one governance regime. Life in corporate administration, though never easy, is at least straight-forward: one voting process at an AGM in a single location, and accounts satisfying one set of accounting standards. Any variation to the manner in which these companies’ securities are traded and settled is set according to the domestic agenda in the home market.
On the other hand, multinational issuers have anything but simple and standard processes which set the framework for their corporate administration, shareholder servicing and compliance.
Multiple stock exchange listings
In many cases the listings of multinational companies are legacies of past corporate transactions, typically mergers and acquisitions. In some companies the effect is almost to make them ‘stateless’. Many such issuers say their intention is to reduce the number of stock exchange listings in order to reduce cost and complexity, yet declare their intention to diversify their investor bases geographically.
A stock exchange listing is often seen as a ‘brand carrier’ in consumer markets, a useful aid to product marketing. Additional listings can provide an issuer with an additional route to capital as well as catering to the needs of a discrete population of investor or employee shareholders.
As an aside, the sponsors of Exchange Traded Funds seem to have embarked on a campaign of listing their products on a wide variety of national stock exchanges in order to access local populations of investors more effectively. Equally, the listing of hedge funds is growing in terms of the variety and markets in which they choose to base themselves.
So what works for major multinational corporations in terms of achieving a growing cross-border investor following whilst avoiding the need for multiple stock exchange listings, does not necessarily hold true for the promotion of financial products which frequently have the support of very significant marketing budgets.
In a recent survey of multinational issuers the growth of ‘regulatory competition’ was highlighted. This term referred to the increasing tendency for regulators to take an intense interest in the effect of their policies on the commercial success of the financial services industries that they regulate.
Similarly, serious political interest was clearly at work in the period before the NYSE and Euronext solidified their merger, with the high profile publication of the Lachmann report suggesting that an alternative merger between the French stock market and Deutsche Börse was preferable to linking with the NYSE. Despite the status in France of the report’s author, these recommendations were shelved and the trans-Atlantic merger went ahead.
Against this very un-independent behaviour by regulators and legislators, how do issuers, and particularly those issuers spanning several marketplaces, react?
In the first place, issuers have an important and fundamental choice to make in identifying their lead stock market and home market domicile. For many the choice is easy, but the increasing trend towards cross-border company mergers does create the need for a serious decision to be made between the domiciles of the target and acquiror. For others the choice is still less clear, particularly where the two parents of a merger have similar capitalisations and status in comparison to their respective home markets.
The choice of domicile or destination in the case of a merging company may have huge impact, especially in markets where regulators or authorities have taken an unpopular course of action with respect to corporate operations, such as Sarbanes Oxley in the US and the increasing tax burden on companies in the UK. It is not unknown for domestic regulations and even law to be changed in anticipation of such choices.
Issuers’ hopes
A survey of multiple-listed issuers undertaken by Hembury Associates in 2006 produced two heart-felt demands from company secretaries. A single set of global listing requirements would greatly reduce the costs and complexity of engaging and satisfying the needs of their global investor populations. Further, a global register of shareholders, as opposed to maintaining separate registers in principal listed markets, would again offer many benefits to the efficient administration of such companies and, importantly, to maintaining standards of good corporate governance.
From the point of view of a large company with several stock exchange listings, the logic of these developments is inescapable.
To multiple-listed issuers who may be striving to meet the conflicting requirements, and often obligations, of their listing jurisdictions, a single listing is already high on their ‘wish-list’. For example, one investor relations officer of a triple-listed company remarked that, once the locally prepared accounts of the company had been filed with the local stock exchange and separately filed with the domestic listing authority, and once these accounts were similarly filed in the two other jurisdictions according to different accounting standards, “You would be hard put to recognise the company from the final accounts.”
So in seeking to comply with the disclosure requirements of different markets a situation is created where the resultant information can be inferior to the original data. And the reality is that in the majority of cases, institutional investors have access through their advisors to translation and interpretation of the original corporate data. For the majority of institutions, their commercial data providers have not stood still in recent years and the availability of sophisticated corporate data, on-line from companies all over the world, is very rich indeed.
To reach out to other investor categories there are tried and tested methods of achieving the form and benefits of domestic shares via Depository Receipts, which continue to grow their stable of companies from an increasing number of countries.
Global registers
As far as global registers are concerned, an immediate and valuable impact would be to unite all the settlement systems worldwide through which the transfer of title to shares resulting from stock exchange trades, broker networks and other trading platforms are processed. Each multiple-listed company would have access to a single shareholder database. Naturally, investors from certain markets in which nominee/street names are common would be bulked together and therefore initially invisible behind their advisors. In the same way, markets such as the Netherlands where shares are held by the settlement system in bearer form would not initially enable individual investors to be identified.
However, some of the companies who are thinking about these issues feel that once it becomes easier for companies to communicate with their global investors in a more uniform and effective way, it will be possible to develop some direct and more rewarding relationships with them.
It is not beyond possibility for companies to encourage investors to disclose their identity in a relationship which would be exclusive between the two parties and, significantly, removed from both advisors and regulators. Why not? The technology undoubtedly exists and there is real benefit to be gained by both parties.
The legal domicile of the global register could be in the home market, and therefore the home jurisdiction, but as we know, it may be felt that the home jurisdiction lacks some degree of company-friendliness. Equally, the single global listing could be anchored in a company- and investor-friendly market, leaving it up to other stock exchanges to import the shares for quotation (as opposed to listing) on their trading platform.
Issuer-driven exchanges
This current dislocation of the traditional capital market value chain seems unlikely to be resolved in the medium-term. Some major investments in new trading platforms are being considered, and the benefits to all of the new competitive ‘horizontally poised’ world are being pumped up to support them. And regulators are falling over themselves to extol the virtues of liquidity as the chief aim of markets with stock lending for all – which must be increasingly puzzling for multinational issuers.
Instead of withdrawing from this merry-go-round, there are some grounds for exploring an issuer-driven strategy to exploit this trend.
In international debt markets, the engagement between issuers and investors looking to buy debt securities has changed over recent years. Under a process termed ‘reverse enquiry’, an investor will approach an issuer directly to buy a particular quantity and maturity of securities. The two parties strike a deal and the securities are issued to the investor with a minor interaction from a broker.
As a result there is direct interaction between issuer and Investor without the participation of a stock exchange. Other than in private placements, the investors are free to sell their securities to a willing buyer.
For major companies, particularly those with globally recognised brands, websites are important components in the communication infrastructure with customers and the wider public. They are increasingly full of interactive functionality, for example directing enquirers towards product sites, on-line sales and other subsidiary sites. The on-line public is invited to register by supplying personal details and selecting a PIN, thereby establishing a potentially close and active relationship. This functionality can be supported remotely and at any time of day and night.
So how can this capability be put to work for issuers to resolve the impact of the current dislocation?
There is nothing to stop an issuer from creating its own trading platform. Several of the oil majors have their own oil trading platforms on which they trade their products actively with clients, competitors and suppliers. Extending the principle to their own issued securities seems a relatively simple step, subject of course to regulatory and legal considerations.
Admittedly, ‘single issuer stock exchanges’ sound unorthodox, but if they were additionally used to issue and administer debt securities, such as corporate bonds, medium term notes, commercial paper and other money market instruments issued by the same company (and for banks, the usual plethora of preference share issues) the value of the facility increases.
issuer stock exchanges could be registered with and regulated by the home market regulator, or indeed by another regulator offering a more advantageous regime. New issues and continuing obligations would be supervised by the local Competent Authority. The operation of the stock exchange would be largely outsourced to the population of specialist providers, in the same way as the orthodox stock exchanges. This would present a valuable opportunity for the concept of ‘corporate stock brokers’ to make a high profile come-back, as there would be a role for a lead advisor to take overall responsibility for the market side of these exchanges. The Nomad role on AIM sets an interesting example.
Market makers would be welcomed to participate via electronic linkages in the pricing mechanism and the order book. Execution, trade matching and settlement would follow precisely the same routes as are contemplated for many of the trading platforms that are currently being developed in Europe.
Corporate information and announcements would follow a very short route to the ‘public markets’. Meeting the various corporate governance codes and standards would continue to be a direct responsibilities of the managing company, its Board and company secretary.
For strategic markets like the US, where the regulatory requirements are at significant variance to the increasing deregulation of a European issuer’s home market, the domestic securities would be likely to continue to be listed on a US exchange with Depositary Receipts being used to translate the domestic shares into US format. On one hand, the resultant DR could be admitted additionally for trading on the company’s stock exchange in addition to the US market. On the other hand, US multinational companies, operating their own stock exchange in the US market, would be likely to find attracting investors from other markets comparatively straightforward.
Where are the flaws?
Operating its own stock exchange could represent a major increase in the commitment of an issuing company to a capital market whereas the current relationship is sporadic and opportunistic. It might be seen also as both disintermediation of the advisor/intermediary role and a reduction in the choice of market best suited to a particular financing strategy. They would inevitably wish to use their own.
But if the impact of this, admittedly cheeky, extension of a clear trend in stock markets was to enable global issuers to develop a more harmonious and productive relationship with capital markets around the world whilst beginning to address the impact of unlinked corporate governance regimes, the cost/benefit equation could look surprisingly positive.
And if this proved too much to stomach, a really credible stock exchange could make an offer to bring these ‘single share stock exchanges’ in-house.
