Throughout 2000 and the early part of 2001, the on-going saga of Nordic stock market co-operation continued.
For three years now, the talk among Nordic stock market officials has been when and if a region-wide alliance - or even out-and-out link-up - would happen. The golden scenario for many was that the Stockholm, Oslo, Copenhagen and Helsinki exchanges - by far the four biggest in the region - would put aside their differing systems, rules and ways of doing things and join forces to create one super-regional stock trading platform.
The momentum had seemed unstoppable, both in terms of the logic of the situation and in actual, practical advances. But last year (2000) brought events that threw the strategy into doubt and confusion. Can the joint venture still take place? Is it even a good idea any more?
The main players in the drama - Copenhagen and Oslo exchanges, leading brokerages and, crucially, Sweden's OM Group, the driving force behind the venture - can point to some pretty convincing figures and ideas in support of the continuing project. But a spanner has been thrown in the works by the Helsinki exchange in the form of a very un-alliance-like joint venture.
The owners of the Helsinki Stock Exchange, the HEX Group (HEX), completed the acquisition in April 2001 of a majority stake in the Estonian bourse, the Tallinn Stock Exchange, for a total of 17.9 million Finnish kroons - roughly a million dollars. The HEX Group now controls 52.4 per cent of the Estonian exchange. That percentage will increase when the Estonian Finance Ministry carries out its promise to sell its remaining 34 shares in the bourse, brining HEX's stake to 57 per cent.
The deal, said the HEX statement, would 'create a much larger home market' and would 'increase turnover and significantly enhance liquidity. International investors will gain easy access to Estonian securities."
To an outsider, this link-up would seem a good, sober idea. But to the Scandinavian securities trading world, it was a significant event in the Nordic stock exchange saga.
During 2000, most onlookers would have predicted that the Baltic states would join the Norex alliance - it was, after all, the biggest game in town. And yet the Tallinn Stock Exchange and HEX announced their strategic co-operation in February, marking a significant turn in the strategy. Would the other Baltic exchanges follow suit?
Helsinki's nascent grouping of northern European stock exchanges is a competitor to the Norex alliance in concept if not in terms of the actual level of trading. If the other two Baltic states chose to join with Helsinki, where would that leave Norex?
And so it was with some concern that Norex executives began to read reports in the Scandinavian financial press saying that executives at the Lithuanian bourse, the Riga Stock Exchange, were 'denying' that they were meeting with representatives of HEX with a view to joining up with it, as Tallinn had already done. They were still meant to be in talks with Norex, and they - Estonia, Latvia and Lithuania - had indeed signed a declaration of intent on joining Norex in 2000. But 'denials' are often cashed at the opposite of their face value. And crucially for Norex, the HEX-Tallinn deal precludes the possibility of Tallinn signing any deal with Norex.
So the Finnish initiative has cast a shadow over what has up until now been seen as the most likely outcome for Scandinavian trading - a common stock exchange for the entire region, north to south.
So where and what were the stumbling blocks?
At the time of the HEX-Tallinn deal, one Tallinn board member commented that Norex was 'too passive' and 'did not go beyond empty statements.' HEX, the board member went on, had offered a vision of concrete co-operation, capital, human resources and technology. After all, the Baltic exchanges were and are not rich. The immediate capital that a deal with the Helsinki crowd would offer was likely to turn their heads.
But the real financial muscle is on the other side - it is with Norex. OM Gruppen, the Swedish financial company and owner of the Stockholm exchange is the key driver behind the setting up of a common exchange. It is a wealthy and highly competent company (it stunned investors and brokers around Europe in 2000 by attempting a hostile take-over bid for the London Stock Exchange, an outfit somewhat larger than itself).
And, partly because of the OM Group's determination to press ahead with a single trading entity, most market insiders have always believed that the Norex alliance is a natural first stage towards the creation of a common exchange.
The Norex alliance began in 1999 as a two-way venture between the Copenhagen stock exchange and the OM Group's Stockholm exchange. The two remained - and still remain - independent companies, but the Norex venture was the first cross-border integrated equity market operating under harmonised rules and a common trading platform.
At the time, both parties' rationale behind the deal was that it would significantly increase liquidity and efficiency. That looks to have come true. Volumes have doubled since the new Norex trading system - Saxess - was introduced. And new investors have been attracted by the ease of trading cross-border.
New partners were quick to join Norex. Six months after Copenhagen and Stockholm linked up, the Oslo bourse signed a letter of intent saying it would join too. Oslo signed up fully last year. Iceland came on board in March 2000 in order, it said, to open up its small but growing equity and bond market to more foreign participation. Moreover, the existing Norex members have upped their integration and co-operation throughout 2000. Copenhagen, for instance, switched its bond trading system to Stockholm's last year.
So now Norex, judged on total market capitalisation, is the seventh-largest stock exchange in Europe. Moreover, some 80 per cent of Nordic stock and bond trading now goes through the Norex alliance. The decision by HEX-Helsinki to go it alone was always seen as puzzling. But the decision of the Baltic exchanges to side with the smaller entity looked bizarre.
Even so, the main partners to the Norex scheme have not hung about. All the major exchanges have, in their various ways, taken steps forward. The Oslo Stock Exchange, for instance, transformed itself into a corporation last year and listed on the stock market in order, it said, to increase levels of efficiency.
The Helsinki Stock Exchange owners, HEX, already traded unofficially on the London Stock Exchange, has also announced similar plans to list. The Copenhagen stock exchange became a corporation in 1996 but is still not listed. But exchange insiders claim that Copenhagen will, in due time, convert itself into a listed company. And Stockholm, too, is now a private company.
Yet much of this activity, both the joint ventures in Scandinavia and the alterations in the structure of the controlling companies, can be most profitably seen against the backdrop of the wider European - indeed world - securities trading environment.
One of the main reasons why the controlling companies of the Nordic exchanges have taken the decision to list is to free up capital in order to expand their activities. In the new, globalised world this is imperative. As, they would claim, is a bigger stock market brought about by a Nordic alliance.
The idea of a pan-European market is hardly new. Easdaq, one of the first trading platforms to claim to be pan-European in scope was set up over a decade ago. It has hardly caused much of a ripple in stock trading on the Continent since. EuroNM, a collection of secondary bourses that joined forces at about the same time has not made much of an impact either. But now Nasdaq, the American high-tech exchange that lists some of the US's most famous high tech firms and the model that Easdaq had in mind all those years ago, has bought a controlling interest in Easdaq and has promised to "restructure the company into a globally linked, pan-European market". It already has links with exchanges in Japan.
Nasdaq's logic looks unassailable, and has been frequently cited by Norex cheerleaders. Take a look at the fate of small, local exchanges, they say.
For instance, quite apart from the allegedly limited liquidity that small exchanges suffer from, they are also far more likely to be blown this way and that by the winds of trading fashion. And the experience of the Helsinki and Stockholm bourse last year ironically points this up and adds urgency to the debate over Nordic trading.
In the year to April, the Stockholm bourse fell by a painful 54 per cent. Helsinki fell by a marginally more painful 56 per cent. Although part of that poor performance was due to world-wide equity trouble, the fact that a large percentage of the traded stocks on the exchanges are limited to TMT (technology media and telecom) shares means that in a single sector downturn, as the world saw in 2000 following the bursting of the internet bubble, can have disastrous effects on a relatively small exchange. In Helsinki, for instance, telecom giant Nokia accounts for over 70 per cent of the market's total valuation.
A single trading entity, based on Norex would, its proponents say, avoid this fate. Exchanges like the London Stock Exchange, for example, while it also fell during 2000, did not fall by nearly so far (just under 10 per cent, in fact).
So what will happen?
The ins and outs of northern European trading platforms may not attract the attention of those outside the region and the industry. But they show that there is a real debate going on between two competing models of stock trading.
Do exchanges go for the widest possible electronic links? Or do they stick to where they believe the deepest and most committed pool of local liquidity for local stock is? After all, with the likes of Nasdaq, Frankfurt and London all globalising and able to offer liquidity for stocks no matter where they originate from, what is the point behind Norex trying to challenge them from the north? Add to that the fact that liquidity - in other words, investor interest - is not constrained by geography any more, and the rationale looks even shakier.
Then there are the wildly successful computer-driven systems that have been developed in the US. Instinet, run by Reuters, has made steady gains in the last couple of years. In the UK, Tradepoint, which links brokers and banks together so that they can trade shares between their own accounts, has also bitten chunks out of the traditional exchanges' marketplace.
The OM Group itself has launched an online, supposedly pan-European trading platform called Jiway. It came on-stream in November 2000. But trading levels have been far below expectations - 577 completed trades only in February 2000 - and critics have been blunt in their accusations that Jiway is one exchange too many in an environment that is in flux.
But, perhaps worryingly for OM Group, Sweden's independent online brokers agreed earlier in 2001 to set up a new online stock market that would, said a spokesman, significantly undercut the Norex alliance's trading costs. Another source of competition is not what OM Group wanted.
Norex still believes, in the words of one OM Gruppen senior executive, that it needs to be 'in the bourse arena' - in other words, to compete in the big league. And there is an almost irresistible logic behind the Scandinavian countries pooling their efforts and their liquidity.
The final outcome will depend on how equity trading worldwide develops in the years to come. If global computer-driven trading, on the Nasdaq model, comes to dominate, then neither Helsinki nor Norex will stay the course. But if there is still a good reason to have local or regional trading platforms, who knows: perhaps the two competing systems can co-exist?
