The Coming Global Digital Stock Market

Transcription

1 International Finance 2:3, 1999: pp The Coming Global Digital Stock Market Frank G. Zarb National Association of Securities Dealers, Inc. I. Introduction There is little doubt that the stock market of the future is being shaped by today s information and digital age. Never before have so many people around the world had access to so much information, with the ability to act on it instantly through advanced technology. It is access to information by people from Asia to the Americas to Europe that is shaping the stock market of tomorrow. When so many people have access to so much information, it is inevitable that they want to act on it immediately. No waiting, instant results. This phenomenon is shaping the 24-hour, seven-day-a-week, global, electronic stock market that we will soon see. Technology is the enabler to make all this happen, but it is information that is the driver. Until recently, stock trading in the US was much the same as when it began on Wall Street in the late eighteenth century. Then the Internet and advanced computer and communications technologies came along, and all that changed. The Internet is causing a behaviour shift information technology and the Internet are facilitating a dramatic and profound shift in consumer behaviour. No other sector in the economy is being affected by the e-commerce revolution as much as the securities industry. Both individual and institutional investors are demanding the access, the information and the transactional capabilities that creative applications of on-line technology can provide to the process of trading stocks, both in the US and elsewhere Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA

2 442 Frank G. Zarb II. What the Stock Market of the Future Will Look Like In a few years, trading securities will be digital, global and accessible 24 hours a day. People will be able instantly to get stock price quotations and instantly to execute a trade day or night, anywhere on the globe, with stock markets linked and almost all electronic. Trading floors and paper, for the most part, will be rendered obsolete by competition and technology. Investors will use not only their home or office computers, but also cellular phones, pagers and palm-sized computers, to access the markets on the Internet, get price quotes and execute trades through their brokers. Access to information and acting on it is what is driving this phenomenon. Investors will even be able to get programmable computerized reports on the performance of their personal investments through their car radios while driving to and from work. At the office or at home, they will be able to get the same information broadcast to them on digital television. As for stock markets, they will see global alliances, mergers and new electronic ventures with entities outside of the traditional financial services industry. That will give companies listed on these markets access to pools of capital internationally, not just domestically, and consumers will be able to invest in a worldwide list of companies as easily as trading locally. This twenty-first-century stock market will be a multi-dealer, computer screen based, technology-driven inclusive hybrid open to all all because people will have access to information that they want to act on. This new market will bring benefits to investors, listed companies and the economies of countries across the globe. Trading will cost less for consumers. Markets will have more liquidity. Raising capital for companies will be easier and more efficient. Entrepreneurial businesses in both established and developing economies will be encouraged. New investors and markets will grow in places like China. Investors from Europe to Japan to the Americas will invest across borders with ease. III. Factors Driving the Change Several factors are driving the changes. The first is that advances in computer and communications technology, glued together on the Internet, are shattering geographic boundaries and enlarging the investor class. The new investor world, from the smallest individual shareholder to the largest institutions, is demanding, and starting to get, more instant access to information and faster execution of trades. About 96 million people in the US now have access to the Internet; a half billion worldwide are expected by the beginning of According to one

3 The Coming Global Digital Stock Market 443 survey, 45% of American homes have computers. E-commerce, a word coined just a couple of years ago, was estimated by one recent survey at US$102 billion in 1998, with people buying everything from music to financial products on-line. Physical markets are being challenged by the computer network. The Internet is also resulting in instant information, and people want to be able to act on that immediately to improve their investments. There are about eight million on-line brokerage accounts in the US now. And estimates are that about 35% of individual investor stock trades that is, numbers of trades, not total share volume are made through the Internet, up from about 20% in Of total trades in stocks including those by institutional and individual investors 20 27% are done on-line, depending on the day. The second force driving change in investing is demographics. Worldwide, people are living longer and investing more for retirement. In addition, the number of new investors in Europe and Asia is rapidly growing. The average American is now in the stock market. Almost half (45%) of US households now own stock, compared with only 5% at the end of the Second World War. In 1980, stocks accounted for only 10% of US household wealth. By 1998, this figure rose to 25%. The middle class in the US has become a potent force in the stock market. Similarly, elsewhere in the world, the number of investors is set to boom. There are a billion people in China and as that economy modernizes there will be many millions of potential new investors. Japan s investing profile is changing with more emphasis on equities. The second largest economy will help to lead the changes to come. The third driving force for change is that the economy is now more global and more interconnected, and companies want to be able to raise capital worldwide in stock markets that fit their business plans. Many want their stocks to be traded where their products are sold. Investors the world over want to trade in the US markets, and foreign companies increasingly want to list their traded stocks there. Globalization is proceeding at a rapid pace, with international alliances and ventures and cross-border businesses leading the way. This trend is continuing in virtually all industries, with US and other companies forming subsidiaries and joint ventures. Internet companies are the latest entry. IV. Stock Markets Must Respond to Change to Stay Relevant The move towards an electronic, global interconnected world of investing is coming whether we want it or not. Market forces, as always, will have their way. The existing stock markets, including those in the US, do not now provide the architecture or systems to serve the future market place. Most traditional ways of trading securities do not rise to the standards of the Internet age. Listed companies and investors want demonstrable improvements in the process of

4 444 Frank G. Zarb trading stock. A next generation of stock markets is needed to fulfil global capital formation and liquidity requirements and to provide worldwide, instant price discovery and trade execution in a fair, orderly, low-cost and well regulated environment, without time zone limitations. The best way to deal with this changed world is to embrace it, not fight it or try to slow it. The securities industry in the age of the Internet will have to adopt Internet technologies, extended hours, globalization of stock trading, lower trading costs, better products, instant price discovery, instant trade execution and the ability to trade at any time and anywhere in the world. Also needed is a new dimension of competitiveness and open and transparent markets. In this new market place, middlemen will have to add value to survive. Stock markets will have to become cutting-edge service providers. These changes are a massive challenge to old-line market systems and traditional institutions, and require that higher priority be given to the needs of investors, listed companies and market participants that add value. None of this is easy or simple. The natural urge is to preserve the existing model. It is comfortable and profitable in the short run. However, the status quo no longer adequately serves today s market place and it will not survive. In the light of the new world of investing, there will also be a need to examine how many stock markets are needed. The Internet has just begun to change the landscape. We have had some consolidations of exchanges already and more will come. V. The Successful Strategy Will Be to Embrace and Facilitate Change Going forward, the most successful market will be the one that not only embraces the changing technological and investing environment, but also helps to move the electronic network forward. Some examples of how the Nasdaq Stock Market is implementing the future today are now given. The Nasdaq Stock Market, the first all-electronic market, is constantly upgrading its capabilities. In 1971, in what was then a revolutionary move, Nasdaq began trading on a screen-based automated securities quotation system that linked the terminals of market makers across the US. Today, a billion shares a day of trading is now routine and our capacity is 1.75 billion and will be 2 billion by the end of We are engineered for 4 billion. As we build on our work at home, we are also moving on the international front. In our view, we need to build on our successful domestic stock market model internationally. Among other things, we are continuing to explore overseas ventures and alliances.

5 The Coming Global Digital Stock Market 445 On 15 June 1999, we announced an effort to introduce an all-new, electronic, Internet-based stock market in Japan. Called Nasdaq-Japan, it will give Japanese growth companies the ability to raise capital and trade in both markets. Japanese investors will have access to those stocks and to Nasdaq stocks. We are fortunate to have a high-quality Japanese partner, Softbank Corporation, which shares our global views. This venture will be led by a Japanese management team. In partnering with Softbank, a leading Toyko provider of information and distribution services for the digital industry, we believe we are breaking the mould in how we view the future. Going forward, stock markets will be operated like business enterprises and held to the rigours of competition, and be agile and responsive to changing market conditions. Our venture with Softbank helps to demonstrate a new entrepreneurial dynamic and spirit. The plan is that while the US Nasdaq is open, Japanese investors will be able to trade in all of the Nasdaq stocks on Nasdaq-Japan. After we close in the US, Nasdaq-Japan will trade in the top 100 Nasdaq companies in Japan. In addition, some of the Japanese stocks will list with us in the US, so Americans can trade those Japanese entrepreneurial companies. Thus, Nasdaq-Japan could have an almost around the clock trading day. Combined with our coming evening trading hours in the US, Nasdaq s top stocks will, in effect, be trading around the clock in either the US or Japan. Working with our Japanese partner, we should be able to leapfrog into the next generation stock market technology. We also are working on a cross-listing programme and have a joint Web site with the Stock Exchange of Hong Kong that will enable US investors to trade in Hong Kong securities and vice versa. In a pilot project, selected Nasdaq companies will soon trade on the Hong Kong Exchange, and Hong Kong companies will trade on Nasdaq. The new Web service allows investors to review financial data and maintain their portfolios for stocks on both markets in either US or Hong Kong dollars. China also has important potential as a securities market. China is poised to become a major economic force and we must connect our markets for the benefit of both countries. We are in the process of establishing a formal presence in Shanghai to facilitate that effort. In Europe, we are investigating joint programmes in several markets, including alliances with existing exchanges and the formation of new ventures. Our goal overall is to expose listed companies to global pools of capital and American investors to non-us listed companies. There are two important points to make about cooperative ventures. First, stock markets are worth more when they share and are shared with. This principle is a shift from the traditional strategy of come list your stock with us and then monopolizing the trade flow. Second, cross-border alliances and joint ventures require patience and skill, especially when there are significant cultural and political differences.

6 446 Frank G. Zarb We are not limiting ourselves to stocks in our new ventures. Recognizing that investors will want ease of market access through single entry points, we are investigating the possibility of adding electronic futures contracts to our platform. Under consideration is the creation of a new, electronic futures trading and clearing system in the US that initially would start with Treasury debt instruments. We would share ownership of this for-profit venture with major investment firms and have begun preliminary talks with some. Once established, this platform could be used to connect to futures trading internationally. The US futures venture would also fulfil one of our major aims: to align our interests with the key investment firms that are important to the Nasdaq market. Finally, the aggressive and innovative strategies we are pursuing will require financing and the most effective organizational structure possible. Restructuring of the National Association of Securities Dealers, along the lines that various overseas markets have done or are in the process of doing, may aid our goals. We have examined very carefully the organizational models of our sister markets Stockholm, Amsterdam and Australia, to name just a few to learn from their endeavours. We think the reorganization of these markets demonstrates the future: markets must act more and more like businesses. We are currently in the process of considering alternative approaches to restructure Nasdaq into a broader stock-based ownership structure. We are doing this for three fundamental reasons: (a) it would better align the interests of our market with the interests of its key participants; (b) it would provide both an infusion of capital and easier ongoing access to capital; and (c) as a for-profit stock-based company governed by leading market participants, Nasdaq will be more agile, flexible and effective in responding to industry and market conditions. In short, we are considering a structure that would enable us to partner with leading firms in both the securities and technology industries. VI. Conclusion It seems clear that stock markets of the future will have a redefined purpose and reinvented architecture, all because more and more people have access to more and more information that they want to act on instantly. The Internet and other technology advancements will provide the tools allowing us to bring a new level of service to the market place, with investor-friendly systems bringing buyers and sellers closer together and eliminating intermediaries who do not add value. The momentum has begun. Around 2005, or even earlier, price information will be available globally, electronically and paperless, and accessible equally to all, individuals as well as institutions, in real time. There will be fair, transparent and immediate

7 The Coming Global Digital Stock Market 447 execution of trades. Market participants will be connected globally, 24 hours a day. Stock markets will be linked with new platforms, ventures and alliances on a 24-hour basis. Competing for stock listings will give way to global listing. Cross-border stock trading barriers will be reduced. Trade rules and accounting standards will help to accommodate this as investor needs influence the political process. Costs of processing the buying and selling of stocks will drop dramatically due to technology and competition worldwide. A natural evolution to such a new generation stock market is now under way. The leaders in this new world of investing will be the ones willing to be agents of change to meet best the needs of investors and companies. The underpinning of all this change has to be to do what is best for investors and companies. Frank G. Zarb Chairman and CEO National Association of Securities Dealers, Inc K Street NW Washington, DC USA