NYSE in Europe?
Investors Won't Notice Much Change at First

By Brooke A. Masters and Paul Blustein
Washington Post Staff Writers
Sunday, June 11, 2006

For small investors, the New York Stock Exchange's $10 billion plan to buy Paris-based Euronext NV, owner of four European stock exchanges, holds a lot of far-off promise but relatively little in the short term.

Later, investors may benefit from new investment opportunities and lower transaction costs. But for now, the "merger of equals" will do little more than create a holding company that operates equities markets in New York, Lisbon, Amsterdam, Paris and Brussels, a derivatives market in London and the electronic Archipelago cash and options market.

U.S. regulators will continue to oversee the U.S. markets, and European regulators will oversee the European markets. Stocks that are listed in both markets will have extended trading hours because of the different time zones, but most U.S. small investors won't have much direct access to stocks that are listed on the Euronext markets unless they are also listed in the United States. (Though there is not an absolute ban on Americans buying foreign stocks directly, most American brokers do not sell such shares to small investors because of legal requirements that investments be suitable for their customers.)

For the medium term, small investors will benefit from the deal in two ways. They will probably get new investment choices, such as exchange traded funds that include Euronext stocks as well as derivatives and options contracts. And, their transaction costs may fall as the exchanges save money by merging operations, and the larger transatlantic pool of capital leads to more efficient matching of buyers and sellers.

New York Stock Exchange chief executive John A. Thain, in an interview, predicted that the two companies will be able to cut $250 million from their $650 million annual technology budgets, making it possible to cut user fees. Small investors probably will not save much, but institutional investors such as mutual funds and hedge funds are more likely to, and they could pass those savings on to their small-investor customers.

The really interesting questions raised by the NYSE-Euronext merger -- and other proposed cross-border mergers such as the Nasdaq Stock Market Inc.'s so-far unsuccessful bid to acquire the London Stock Exchange -- will come in context of investor protection.

Many newly public foreign companies do not list their stocks in the United States, in part because of the strong financial controls required by the 2002 Sarbanes-Oxley law. Last year, 23 of the 24 biggest initial public offerings worldwide were not registered in the United States, and U.S. listings by foreign-based companies declined from 100 in 2000 to 35 last year, according to NSYE Chairman Marshall N. Carter.

The NYSE-Euronext deal was structured specifically to keep Euronext companies exempt from Sarbanes-Oxley, but the issue is clearly going to come up if -- as most analysts expect -- the two companies try to completely integrate their markets. The question will be whether the Securities and Exchange Commission should relax the rules on selling foreign-registered equities to Americans, or exempt foreign-registered companies from the accounting and other controls put in place after the scandals at Enron Corp. and WorldCom Inc.

"No matter what the SEC does, there will be criticism," said Benn Steil, director for international economics at the Council on Foreign Relations. "If they liberalize, people will ask, 'How will American investors be protected?' If they don't liberalize, then they'll have players in the markets saying, 'Wait a minute, how do you expect us to produce a truly global market, how can you call this a truly unified market, with cost savings and efficiency?' So there will be pressure on both sides."

Rep. Michael G. Oxley (R-Ohio), for whom the law is partly named, and SEC Chairman Christopher Cox have already said the merger gives new impetus to their efforts to work with foreign regulators to harmonize registration rules and investor-protection standards.

Some analysts say the merger is likely to increase the transatlantic flow of capital -- with more Americans and Europeans investing in each other's companies. The creation of a single trading platform and lower transaction costs could reduce what is known among economists as "home bias," the tendency of investors to put a disproportionate amount of their money in stocks in their own countries, and less in foreign stocks, than pure economic theory would suggest.

"When transactions costs fall, Americans will start holding a larger percentage of their investments in foreign securities, and vice versa," Steil said. "This merger, in and of itself, will not lead to a huge revolution. But it's a first step. We're moving in the direction of a more globally integrated securities market, where you would expect it would produce more diversified portfolios -- in other words, less home bias, and more capital flows."

One obvious way the merger will make it easier for Europeans to invest abroad, Thain said, is that the combined market will allow them to buy U.S. shares denominated in euros. "If you have a euro bank account and a euro brokerage account, you can't buy things in dollars" without having to pay currency conversion fees, Thain said. The new arrangement "makes it much easier."

Andy Kershner, who runs a trading firm in Austin, predicted that once the two exchanges harmonize their technology, direct access to foreign markets for small investors via the Internet won't be far behind. "We're talking about democratization of the markets," he said. "We've gone from you have to be in New York to trade to electronic access for professionals to direct access [to U.S. markets] and now you'll be able to trade all over the world."

Some investors said the merger's potential impact is being exaggerated.

"I can't imagine any good reason why we should be any more invested in the United States as a result of this merger," said Lodewijk van der Kroft, director of institutional asset management at Theodoor Gilissen Bankiers in Amsterdam, which has about $10 billion in assets under management. "Perhaps the transactions costs will diminish to a certain degree, which will allow the thresholds to invest in the U.S. to be somewhat lower. But the transaction costs are already so low, and they are peanuts compared with the ultimate costs of being invested in the euro zone versus the United States or other foreign stocks."

University of Maryland business school professor Peter Morici argued that most of the changes associated with the merger would happen anyway. "With or without the merger, trading costs are headed south because of the growing advantages of electronic trading, the deregulation of international capital flows and the competitive discipline imposed by the Internet," he said.

There's also the very real possibility that the merger won't go through.

Under the terms of the deal, neither side has to pay a financial penalty to walk away. Several top European policymakers, including French President Jacques Chirac and European Central Bank President Jean-Claude Trichet, have urged Euronext to keep its focus on Europe. Germany's Deutsche Boerse AG has made a rival bid for Euronext and could raise its offer.

While the U.S. reaction has been more positive, it's still possible that Congress or other policymakers could react badly to the prospect of a merger that could make a Frenchman (Euronext chief executive Jean-Francois Theodore) second-in-command and possibly the future head of the New York Stock Exchange.

"This is the sort of thing where powerful economic forces within each country say, 'Wait a minute. Does this mean foreigners are running our stock market?' " said James J. Angel, an associate finance professor at Georgetown University.