The merger of the London and Frankfurt exchanges should not be too surprising. With screen-based trading and the demise of stock exchange floors, and with mega-mergers all the rage there is no good reason for the exchanges themselves not to join the fun.
And there are compelling arguments in favour.
A property analyst, bemoaning the lack of interest in property company shares, told me that Vodafone Air Touch makes up 14% of the FTSE 100 Index and that the top five telecoms and pharmaceutical companies make up not far short of 40%. It makes you wonder about the value of the index as an index and explains the arrival of TechMark and other pan-European indices. Why shouldn’t the exchanges follow suit?
What has been curious is that most observers seem pretty relaxed about the implications for London’s role as a financial centre. I’m not sure such relaxation is prudent.
Take two observations. Most commentators take considerable comfort from the news that Werner Seifert, the chief executive of the newly dubbed iX, is to be based in London. So what? Probably more significant is that London is to host blue chip — largely old economy — stocks while Frankfurt bags the hi-tech growth stocks.
Then go back a step, to the days of exchange floors. Until 1986 it was necessary to be pretty close to the stock exchange. But the Stock Exchange Automated Quotations system changed all that. SEAQ put dealing on the screen and made Canary Wharf possible.
The link? Just about every important decision about Canary Wharf, from its conception to discussions with prospective occupiers was taken outside London, and most commonly in New York. Although that was part of the reason it ran into trouble in the recession of the early 1990s — sometimes there is no substitute for local knowledge — it is equally the reason it happened at all. Without attachment — emotional, ideological or habitual — to the previous assumptions of the London market, something new was created.
So now we have a London-based stock exchange head who is German. That he is London based is of little consequence, however.
Consider Rover. Longbridge has over 100 years of car making history, and BMW had local management in place. But it proved too much for the Munich based shareholders. Similarly, Ford has strong local management for Dagenham, but the US bosses are seriously considering closing a large chunk of the plant. The specifics of each case are of no consequence. The point is simple: the real decisions, the fundamental strategic decisions, are taken elsewhere.
What Herr Seifert will bring — and moving to London will not change this — is a European perspective.
So how many times have you heard the arguments? London speaks English, it’s in the right time zone, it has an appropriately skilled workforce, it has the physical infrastructure. All are perfectly valid arguments, but if you think about, variants could be applied to Longbridge. Its staff should understand English speaking markets, it certainly has experienced car makers, it is where cars have long been made (albeit less so that in the past). Did any of those help when global pressures came into play?
Nobody seems under any illusions that Frankfurt got the best end of the deal in this merger. Just ten years ago that would have been unthinkable. The UK economy has been caught out many times by not being nimble enough. Several years ago I asked a currency dealer what the implications would be of the European Central Bank being based outside London. He said: "Within 15 years London will stop being a major financial centre." Maybe he was right, maybe not. But it is time to give the question serious, non-ideological thought.
© 2000 Ian Cundell