The lights burn 24 hours at the Manhattan headquarters of Merrill Lynch & Co.
Its home turf New York Stock Exchange normally shuts for the day at 4 p.m., but there is no end in sight for things to be done. At 7 p.m. New York time, the Tokyo Stock Exchange, half a world away, opens for business as the sun edges up in the sky there. Late into the night in New York, teams of Merrill brokers and economists are hard at work, monitoring minute-by-minute the Tokyo price movements, advising clients, placing buy and sell orders there by long-distance phone or computer on behalf of Merrill or people it represents.
At 1 a.m. New York time, Tokyo's market closes. But there is still data to digest from Singapore and Hong Kong, where markets remain open. Then at 4 a.m. New York time, London's market opens and the world's focus shifts there. British trading is nearing its end when across the Atlantic the bell sounds on the floor of the New York exchange and another day of trading opens. The daily cycle is complete.
In the past decade, the financial markets of the world have become tied together like never before in history.
Countries have steadily lowered regulatory barriers to an international interchange of money, stocks, commodities and virtually every other financial instrument. Lower-cost, instantaneous international communications has linked markets, financiers and deal-makers. And driving the entire process has been the emergence of a global marketplace, whose massed buying power is overwhelming national borders.
"Financial transactions are now around the world, around the clock," said Prof. Walter Hoadley, senior research fellow at Stanford University's Hoover Institution.
While governments and the financial industry have viewed the linkage as fundamentally positive, the earthquake in the world's financial capitals in the past two weeks has exposed its darker side.
Overheated markets, rising interest rates, investor uncertainty and the United States' twin deficits in trade and federal finances are widely cited as the basic causes of the October collapse. But many brokers feel the fact the world's markets are now electronically wired together greatly increased the speed of the plunge.
"The ability to move very large amounts of funds around the world instantaneously has given investors internationally a far greater ability than they ever had to cause violent movements," said Julian Healing, head of international equities at Kleinwort Grieveson Securities in Britain. As the dust settles, market participants are watching to see what -- if any -- changes will occur in how the markets operate or how governments regulate them.
Officials at the U.S. Securities Exchange Commission estimate that foreign investors carried out about $131 billion of transactions in U.S. stocks in the first half of 1986, more than three times the figure for all of 1982. U.S. investors' dealings in foreign stocks rose to about $46 billion in the same period, about double 1982's figure.
Before the October plunge, it was estimated that U.S. institutional investors were holding $10 billion to $13 billion in foreign equities in their portfolios, compared with $1 billion to $2 billion five to 10 years ago. A similar mushrooming has occured in many other financial instruments, with the Japanese today routinely snapping up a third or more of new issues of U.S. Treasury bonds.
Interdependence is rapidly growing, yet the world's markets retain sturdy internal dynamics of their own and resist integration. Frankfurt's stock market, the largest in West Germany, suffered its biggest single-day loss a full week after New York's "Black Monday" plunge of 508 points on the Dow Jones industrial average. One important reason is that the German market is highly atuned to shifts in exchange rates and the dollar was stable at the time. The following Monday, Frankfurt prices headed down in record volumes in reaction to news that the dollar was falling against the mark.
There is only partial overlap in companies listed on the world's exchanges, limiting how many can be traded through the night. There are at present only three truly world-class markets for stocks -- New York, Tokyo and London -- with time gaps between the close of one and the opening of the next. Plus, the Tokyo exchange by tradition takes a two-hour lunch, and in that time no business is done.
Markets retain different operating rules. Tokyo's, for instance, limits the amount by which a stock's price can rise or fall in a day, a device aimed at blocking a cataclysmic single-session collapse. New York's does not. In West Germany, it is rare to buy stocks on credit. In New York, it is a way of life.
Each market dances to a degree to the home economy's distinctive beat. And the differences in scale are huge -- the total value of all the companies traded on West Germany's eight exchanges is roughly equal to that of Japan's largest company, Nippon Telegraph & Telephone Corp.
There is always a certain amount of capital that stays home, even if a better return can be found abroad. Small investors may view the outside world as forbidding. Government rules may prevent some from going out, even in this age of deregulation.
In theory, Japan has a free flow of capital going out, but its Ministry of Finance places percentage ceilings on how much of their portfolios insurance companies can invest abroad. On the incoming side, foreign investors face limits on how much of individual Japanese firm's shares they can own and are forbidden to own a single share in NTT.
Listing and trading rules present another barrier to true integration. The United States maintains its own standards of size, auditing and disclosure. Japan maintains another, and the United Kingdom yet another. Concepts of insider trading vary, and in some places hardly exist at all.
Still, there is no denying the integration that has taken place. The scope of markets in former days was limited to individual cities or countries. Now, a Des Moines retiree who tells a broker to unload 100 shares of IBM is offering them to the world as a whole.
The markets today have less and less respect for national borders. "For extended periods of time recently," says a senior officer at a major U.S. brokerage firm in London, "there has been a better market in London than in Stockholm for Swedish stocks and a better market in London than in Paris for some French stocks."
Today, perhaps 10 percent of shares moving on the floor of the New York Stock Exchange are going to or from foreigners. In Tokyo, the figure is estimated at about 11 percent, and international trading has risen sharply in London, too. This flow is widely seen as one of the reasons for the world bull market, in New York in particular, where Americans held faith that foreign money would keep prices going up indefinitely.
In many cases, exchanges have actively sought out foreign business, spending billions of dollars on communications equipment.
They have scrapped tradition by extending opening hours to increase overlap. In September 1985, the New York exchange bade farewell to a years-old starting time of 10 a.m. in favor of 9:30 a.m.
The next year, London and the National Association of Securities Dealers opened a wire to exchange data on 288 stocks that are traded off exchange floors.
In the old days, stock brokers driving to work in New York thought about what Wall Street had done the day before. Now, they are likely to hear on the car radios news of what London is doing and what Tokyo did in the hours before that. Their choices are further complicated by the proliferation of new instruments. with special rules and ideosyncrasies.
"It's a young person's game now," says Healing of Kleinwort Grieveson. "People seem to stay up all night. They can't get to sleep because they're afraid to be missing something. They keep pocket calculators close to their bedsides."
Who these days is following whom? By traditional wisdom, Wall Street sets the tone and the rest of the world falls in line. Now, increasingly, Tokyo seems to be exercising leadership. There may be two reasons for that: Due to the rapid rise in the value of the yen since 1985, total capitalization of companies traded on the Tokyo exchange now rivals that of New York. Also, everyone knows that Japan, with its mammoth trade surpluses, is where the money is at this point in economic history and tries to second-guess it.
"The rule of thumb that we go up as Wall Street goes up is no longer valid," says Peter Schwarz, managing director of Merrill Lynch Capital Markets' operation in Frankfurt. "Now the biggest question when we get to work in the morning may be, what are the Japanese doing?"
Monday, Oct. 26, saw a big new selloff in New York. But when Tokyo's Tuesday trading day began a few hours after New York closed, the slide halted. Prices began to rebound. London followed with a rise and so did New York when Tuesday's sun finally rose there. Was Tokyo responding to its own dynamics and confidence in the future of the Japanese economy, or were people there still looking to Wall Street but betting it had reached bottom for the time being? No one can tell.
The conventional wisdom in the financial community is that the global linkages are a plus. Bigger markets mean more buyers and sellers and a greater opportunity for smoother, faster trading, offering greater stability and economic efficiency. With the dust settling from Black Monday, many members of the industry are saying the system proved itself, with markets staying open -- Hong Kong is the major exception with a four-day closure -- despite the torrential volume of sell orders.
Yet another troubling side of the revolution has been exposed this month, some analysts say. With the world connected by electronic wire, markets can take off at breakneck speed. A hiccup in one is heard instantly in the others and people there can respond just as fast. The linkages, in some experts' view, could raise chances of everyone running on cue to the same side of the boat and capsizing it.
Belief that integration of the world's markets makes the system more stable could create false confidence and increase speculative dealings, the pessimists say. In fact, electronic linkage could focus on one time and place the whole world's sell orders in a way never before experienced. That could create a market "meltdown" of such volume that in the end no one would be able to sell.
On a smaller but still important scale, one American economist suggests, integration's dark side has already been felt. Late last year, an $18 billion, London-based market for a new instrument known as prudential floating rate notes collapsed, inflicting huge losses on note holders.
Some analysts suggest that October's events could slow momentum for internationalization. As regulators take stock of October, the reasoning goes, they could feel uneasy at having the home market hostage to the whims of foreign markets or foreign investors. "As this interrelationship explodes," says Hoadley, "it's beyond the realm of regulatory surveillence or control."
There are certain advantages to being insulated. South Korea's fast-growing stock market has continued a bull trend throughout the recent troubles most everywhere else -- -- it actually reached a record high on Monday the 26th, the day New York began plunging again. That is because by law it is a private club for Korean citizens, with the exception of mutual funds open to foreigners. The South Korean economy is growing robustly, an unusually free presidential election to be held in December has put political optimism in the air and buying pressure continues unabated.
But closing the doors would be an extreme and highly unlikely step.