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MIS 3090: IT for Financial Services

MIS 3090: IT for Financial Services. Global Markets. Outline. Europe’s financial markets Development of a pan-European market OM ~ Swedish firm at the vanguard of IT innovation Nordic and Swiss Exchanges (innovations) EASDAQ (later became NASDAQ Europe) Settlement Conclusion.

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MIS 3090: IT for Financial Services

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  1. MIS 3090:IT for Financial Services Global Markets

  2. Outline • Europe’s financial markets • Development of a pan-European market • OM ~ Swedish firm at the vanguard of IT innovation • Nordic and Swiss Exchanges (innovations) • EASDAQ (later became NASDAQ Europe) • Settlement • Conclusion

  3. European Markets • Economic Monetary Union ~ quasi-fixed exchange rates (1979) • Fragmented markets – a matter of national pride • Expensive way to raise capital • Resort to bank borrowing, private equity placing • Slow development of an equity culture (26 equity markets) • State owned companies sold off: British Airways, BP, BT • 1999: NASDAQ sought to launch a pan-European equity mkt. • 24-hour continuous trading (linked with U.S. and Japanese markets) • Tradepoint, Jiway (U.K.-based electronic markets: ECNs) ceased ops. • Neuer Market: electronic market operated by Deutsche Boerse • Traditional markets reacting: London, Frankfurt, Paris

  4. Pan-European Markets click to connect • 1999: London, Frankfurt, Paris, Amsterdam, Brussels, Madrid, Milan and Zurich announce plans for a unified equity market • Common rules / regulations, share systems, common trading hours • This would operate as a “virtual market” by linking all systems • Plan collapsed due to lack of agreement on a common system (Xetra) • Paris, Amsterdam and Brussels decide to merge into Euro-next • Paris: blue-chip firms (BNP: banking; Heineken: beer; Peugeot: cars) • Amsterdam: derivatives, futures, options • Brussels: small and medium size companies • Common trading systems based on NSC (used at Paris Bourse) • Merged with Portuguese market, bought London (LIFFE) • Approx 1,333 listed companies (at end of 2004) • Merged with NYSE in 6-2006 – to be called NYSE Euronext

  5. OMX (Swedish-based) • Own / operate exchanges (for profit), provide IT solutions • Expertise in marketplace, clearing and settlement systems • OM created Stockholm Automated Exchange (SAX) • Order-driven electronic trading system (SAXESS) • Multicasting: transactions sent to all workstations • SAXESS system (see description in this article) • OM Technology solutions • Failed to take over LSE in 2006

  6. Nordic Exchange • Virtual market formed by Nordic (Denmark, Iceland, Finland Sweden, Norway) and Baltic (Estonia, Latvia) exchanges • Includes all OMX exchanges • Market trades in equities, bonds and derivatives • Not part of the Euro zone but can trade in Euros • 916 listed companies at the end of 2004 • Knight Trading (NASDAQ’s largest market maker) • Opening a pan-European market with 19 brokers • There is little to stop other market makers or exchanges from opening in Europe – barriers to entry are high but not insurmountable

  7. Europe’s NASDAQ (EASDAQ) • Formed in 1996 – closed 2003 • Run on NASDAQ-like principles and systems • Aims • Remove problems associated with cross-border trading • Provide dual trading mechanism with NASDAQ (trans Atlantic) • Access to capital for bio-tech, info-tech and growth industries • Regulated: Belgium Commission for Banking & Finance • SEC seal of approval • TRAX system matches bids and offers in real time • Settlement information sent to Intersettle (paperless settlement system operated by a series of Swiss banks – based in Zurich) • Direct link means settlement is on a T+3 basis

  8. European Trading System(ETS interface)

  9. Switzerland ~ Financial Hub • 40% of global cross-border asset management for private clients takes place here • Seventh largest stock market (SWX) • Global leader in electronic trading and settlement • 1996: launched electronic trading system (stocks, bonds, derivatives) • Efficient clearing and settlement system • 2001: SWX and Tradepoint launch Virt-x • Pan-European blue chip electronic market • 1998: formed Eurex with Deutsche Boerse • Subsumed German Futures and Options Exchange • World’s largest derivative exchange (options/futures) • 2002: merging with MATIF and MONEP (France’s derivative markets)

  10. VIRT- X (the cross-border exchange) click here to view today’s trades • Provides direct, real-time access to trading in the constituents of all the major pan-European blue chip indices, facilitating sector and index trading • AEX, CAC40, DAX30, DJ EuroStoxx 50, DJ Stoxx 50, FTSE Eurotop 100, FTSE 100, MIB30 and SMI • Trading model encompasses a continuous electronic public limit order book with opening, intra-day and closing single price auctions and full anonymity; can support liquidity providers and off book and block trading requirements • A single clearing and settlement model supporting STP from trade to settlement; uses SWX trading platform • Supervised by the Financial Services Authority in UK click to connect

  11. EUREX click me • Trades derivatives on Euro and US-based equities/indices • Blue chip German, Swiss, Finnish, European and global indexes including Dow Jones (EURO) STOXX 50 and DAX, the benchmark index of Deutsche Börse • Also offers market sector index derivatives based on the Dow Jones STOXX 600 and Dow Jones EURO STOXX Indexes. • Futures and options on sectors such as banking & energy • Alliance with Chicago Board of Trade (CBOT) • Operated by Deutsche Börse and SWX Swiss Exchange • Trading participants connect to EUREX via a private communications network • 700 locations worldwide are connected to EUREX at present

  12. EUREX US Eurex web site

  13. Settlement Systems (T+?) • SEC wants to move from T+3 to T+1 • Reduce market, credit, operational, and systematic risk • Bank of Japan: deployed Real Time Gross Settlement (RTGS) system for bond trading • Offers intra-day settlement (more like T+1) • Singapore and Hong Kong moving to T+1 • U.S.:Systems implications (process is more important) • Exception resolution (late cycle intervention) • Build bridges to settlement and banking systems • You cannot talk about T+1 unless you have STP • Active involvement by Securities Industry Assoc. (SIA) • Omgeo (A Company Involved in STP Technology)

  14. Conclusion • European markets – not yet fully integrated • Euro-next (stocks, bonds and derivatives) • EASDAQ no longer in existence • Nordic and Baltic exchanges (NOREX) • Virt-x (equivalent of ECN) • Eurex (derivatives only) • Traditional physical markets still exist (LSE) • Desire exists for a single integrated electronic market • Barriers: political, economic issues (technology less a problem) • 26 equity markets: single Euro zone market will happen but then Sterling (UK) has opted out for the moment (Denmark, Sweden also) • Move towards STP: harmonize regulations (single order book) • Settlement day: intra-day maybe but why not stay with T+1?

  15. For Next Class… • Read • Online articles on Sarbanes-Oxley listed on the class website • Turn in answers to Shenzhen Exchange case questions

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