The race towards a pan-European exchange speeded up on March 11 when Borsa Italiana, the Italian stock market, agreed to cooperate with the Paris and Swiss bourses in their effort to create a single market for the new century.
With the euro beginning to forge a single economy, investors all over the continent are increasingly demanding standardized rules and one single exchange now that national economic boundaries have been swept away by Emu.
"Without any currency risk, a lot of investors are changing benchmarks and there is a massive asset reallocation going on," explains Roger Nagioff, head of European equities at Lehman Brothers. "These cross-border investments are becoming increasingly common on the continent and Europe would benefit from a centralized stock exchange now more than ever."
In his opinion, it will not take long to come to reality. "It could be a question of 18 months before it happens" he says.
In effect, negotiations have already been going on for a long time. The London Stock Exchange and the Deutsche Börse were the first to move. In July last year they signed an alliance with the ultimate aim of creating a single exchange for the top European blue chips from 2000. By then, the new stock exchange will have a common technical platform, a single interface and a single electronic order book.
The promoters of the Anglo-German project plan to involve other exchanges and following their agreement the heads of the eight major European exchanges (London, Frankfurt, Paris, Zurich, Milan, Madrid, Amsterdam and Brussels) met four times this winter.
They have been discussing the creation of a European stock exchange in broad terms but no concrete result has been achieved so far.
The July Anglo-German agreement has antagonized the French. Paris Bourse officers had been negotiating a similar deal with their Frankfurt colleagues for a long time when the news came out and they reacted resentfully, threatening to set up an alliance of their own.
On January 28 the French stock exchange signed an agreement with the Swiss stock exchange allowing French and Swiss intermediaries automatic membership of both markets and to operate in both of them. And on March 11 came the agreement with the Italian Stock Exchange.
"Our first target is to provide our members with a single page for the three markets," says Massimo Capuano, chief executive officer of Borsa Italiana. International working groups have been set up for this purpose. The aim is to be compatible with each system, not to integrate them on a revenue-sharing basis. "The easiest solution is probably that everybody will keep his own," he says.
Capuano hopes to have the first cross-trading before the end of 1999, even though it will not be on the major cash markets. "It is likely that the first linkages will be launched on smaller markets such as Nuovo Mercato and the Nouveau Marché," he says.
This southern alliance has some points of strength. "The Paris-Milan-Zurich link-up is much more homogeneous than the London and Frankfurt one," claims Lehman's Nagioff.
Also, many observers regard the French stock exchange as one of the best. "It has an excellent electronic system. Executions are easy and rules are balanced and easy to understand," says Nagioff. "The Paris stock market has the most forward-looking officers' team in Europe," says Gary Dugan, European equities strategist at JP Morgan.
But few are expecting them to triumph over the Anglo-German link-up.
"My feeling is that the French are trying to sign an alliance not to create a competitor but to be in a better position when the negotiations for a single pan-European exchange seriously starts," explains Andrew Hood, head of cash trading at Lehman Brothers.
The liquidity and the investor bases that the London and the Frankfurt stock exchanges can bring together leave little room for doubt about the identity of the driving forces of the new pan-European stock exchange.
Also bankers are demanding a central stock exchange for Europe with no more than 50 highly liquid stocks listed and very tight listing rules on the model of the London Stock Exchange. "What is really important is to avoid a loose Dutch-modelled exchange where every company can get listed easily," says Dugan.
But in the end, the success of the pan-European stock exchange could be decided elsewhere - by the UK government. "Much depends on whether the UK joins Emu or not," says Dugan.
If the UK does join, that will trigger an even bigger asset reallocation with all the major UK investors involved.