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«October 2002 World Stock Exchanges are integrating/consolidating/merging: what could be done by Arab Exchanges? Mrs. Hebalah El Serafie Dr. Shahira ...»

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Cairo & Alexandria Stock Exchanges

Working Paper Series No. 2

October 2002

World Stock Exchanges are integrating/consolidating/merging:

what could be done by Arab Exchanges?

Mrs. Hebalah El Serafie

Dr. Shahira F. Abdel Shahid


The paper asserts that the traditional role played by stock exchanges i.e. self-regulatory,

controlled and governed by members or governments is being questioned due to the

spectacular advances in information technology, globalization, growing competition, institutionalization, which in turn has put more emphasis on the need for stock exchanges to change their governance structure in order be more cost efficient, transparent and widely accountable. As a result, stock exchanges started changing their structures and then integrated/consolidated/merged/allied with other exchanges either domestically or cross borders. The second section of the paper confirms that likewise, Arab Stock Exchanges, have no choice but to prepare for the changes taking place in the securities industry globally. The option of establishing “one Arab Exchange” is a long process that must better start an easier form of integration “cross membership”. Any form of integration among Arab Exchanges require political determination as well as economic justification. The authors believe, it would be better, if Arab Exchanges are first restructured and become private prior to thinking of regional mergers/alliances. This is because private exchanges can better judge, which alternatives will best fit their longterm strategies, survival, profitability etc. rather than having government-imposed integration/alliance solutions, that are doomed to failure.

World Stock Exchanges are integrating/consolidating/merging:

what could be done by Arab Exchanges?


The Research and Markets Development Department at CASE is pleased to publish its second published Working Paper Series, which discusses a very crucial and timely topic, regarding the implications of integration/consolidation/mergers among world stock exchanges on Arab stock exchanges.

The authors would like to thank Dr. Sameh El Torgoman, Chairman of CASE, for his great and continuous support and encouragement.

Furthermore, the authors owe special thanks to Dr. Baher El Hifnawi, Senior Associate at Cambridge Resources International, Cambridge, Massachusetts, for his valuable comments, remarks and suggestions.

Thanks are also due to both Ms. Dalia Shafik and Mr. Joseph El Wahsh, from the Research & Markets Development Department at CASE, for their excellent research assistance.


The interpretation, comments, opinions, findings and conclusions expressed in this paper are entirely of the authors. They do not reflect the view of Cairo & Alexandria Stock Exchanges.

World Stock Exchanges are integrating/consolidating/merging:

what could be done by Arab Exchanges?

Outline A. Stock exchanges in the globalization era.

–  –  –


Examples of stock exchanges integration/alliances in various regions including (Europe, United States, Latin America, Asia and Africa):

Various forms of integration & alliances among world stock exchanges.

Restructuring a necessary prerequisite prior to stock exchanges integration.

Reasons for failed mergers and integration among stock exchanges.

Lessons learnt from successful cases of integration of stock exchanges.

Concluding remarks.

–  –  –

E. Integration of Arab Stock Exchanges:

Brief analysis of member exchanges in the Union of Arab Exchanges.

Conditions that will foster Arab Stock Exchanges integration.

Expected benefits of Arab Stock Exchanges integration.

Proposed scenarios of Arab Stock Exchanges Integration.

Concluding remarks.

A. Stock exchanges in the globalization era:

By the end of last century, the international economy started moving towards a single market, due to the liberalization of trade and production, which allowed better and more efficient allocation of resources. Globalization is related to regionalization, based on the fact that globalization can only be achieved by deepening trade relations among regions1.

The transformation taking place in the world economy now is unlike anything experienced before. The increasing availability of global capital, coupled with advances in computing and communications technology, is serving to accelerate the processes of globalization. The barriers to globalization are coming down: not just in Western Europe, North America and Japan, but in the emerging giants of China, India, Brazil and Russia.

Barriers to the free flow of goods, services and capital are also being reduced, indicating that national economies are becoming more closely integrated into a single, interdependent, global economic system.

This is clearly evident in the following: between 1970 and 1997, the number of countries that eliminated exchange controls jumped from 35 to 137. Furthermore, the creation of trading blocs such as the EU, NAFTA, ASEAN and others, have further encouraged trade on a larger scale, providing favorable circumstances for companies to establish operations outside their home countries. Approximately there were 1,330 bilateral investment treaties involving 162 countries end of 1998, according to UNCTAD estimates.

The growth and integration of the world capital markets is in fact one of the engines of globalization. As foreign exchange and bond markets become more integrated, the law of one price begins to apply throughout the world. As equity markets start to integrate in their turn, capital becomes more mobile.

According to UNCTAD, cross-border capital flows rose from $536 billion in 1991 to $1,258 billion in 1997. Due to South East Asian crisis and turbulence in Russia and later Latin American markets in mid 1997 and 1998, foreign direct investment (FDI) were reduced in 1998 to $693 billion. Years 1999 and 2000 witnessed a surge in FDI to reach $1,075 billion and $1,271 billion i.e. a 50% and 18% increase, was in fact caused by the mega deals of Mergers and Acquisitions (M&As). The decline in M&As, both cross border and domestic, is related to the slow down in world economy witnessed in 2001 and accordingly FDI dropped to $760 billion in 2001.

Analyzing FDI flows in 2001, it can be noted that the bulk of those flows (67%) went to developed countries, the remaining 33% was divided among developing countries where the lion’s share went to Asia & the Pacific region that received $245 billion, followed by Business Studies Series, Exporting to COMESA and South Africa, American Chamber of Commerce, February 2000.

Latin America which received $80 billion, Central and East Europe acquired $52 billion and finally Africa managed to obtain a mere $10 billion.

This widespread mobilization of capital movements has fostered fierce competition among financial services, enhanced by technological innovation that allowed substantial capital amounts to move quickly and safely across borders, as well as the worldwide diffusion of information in real time. The value of the world economy that is open to global competitors is estimated to have risen from $ 4 trillion in 1995 to well over $ 25 trillion in 20012.

Traditionally, stock exchanges were natural monopolies, non-profit and mutual or cooperative organizations. Stock exchanges used to be self-regulatory and to be owned, controlled and governed by their members, who enjoyed a high monopoly in the trading of domestic securities and were protected from meaningful cross-border competition.

Increasingly, this traditional ownership and governance structure is currently being questioned due to the spectacular advance in information technology (which allowed the provision of the immediacy, price discovery, liquidity and transparency), globalization, institutionalization, growing competition in the rise of alternative trading systems i.e.

Electronic Communication Networks (ECNs), which has put more increasing emphasis on the need for stock exchanges to be more cost efficient, transparent and more widely accountable. Accordingly, traders and investment firms no longer confine themselves to their domestic markets or their immediate homeland, but can reach out to pools of liquidity in other countries and route their orders whenever they choose seeking the best price for securities across a number of different exchanges.

The cumulative effect of these developments posed major challenges and threats to the continuation of the traditional exchanges and accordingly the last decade has witnessed a dramatic evolution in the financial industry, which has led to automated exchanges at the beginning of the nineties, in the mid nineties, competition among exchanges produced new trading systems, technological agreements among existing exchanges, price wars, consolidation, integration of stock exchanges, mergers, takeovers as well as the creation of new exchanges even within the same country, in order to enhance efficiency and liquidity.

Furthermore, many quasi-exchanges such as ECNs have developed and reforms of regulations in many countries have led stock exchanges to demutualize (turn from nonprofit, mutually owned by members into profitable client-driven companies with shareholders, resulting in the separation of ownership and membership i.e. members enjoyed trading rights but no longer membership rights, and in some cases get the exchanges themselves listed), with the objective of expanding their markets, providing cheaper and better quality of services, implementing good market inspection and What’s new about globalization? Mckinsey Quarterly web site, at http://www.mckinseyquarterly.com (1997, Number 2).

compliance mechanisms3. Many exchanges have also integrated other services- such as clearing and settlement and derivative products as witnessed in the recent merge of Deutsche Borse with Clearstream, in order to offer a “one-stop shop” to market participants. Other exchanges specialized in providing transaction technology by offering integrated and cost-efficient IT solutions to markets around the world like OM Group, which owns Stockholm Stock Exchange, which offered its exchange technology to over 25 international exchanges and clearing houses.

Another equally important area of development, that accompanied the globalization of securities markets, is the manner in which markets are regulated. Competition is acting as a spur for exchanges to continually improve the quality of their trading platforms and rule books. Good regulation implies that regulators, exchanges and investors all share responsibility of maintaining the quality of the market place. It should also mean that firms that provide the same service should be regulated in the same fashion. Regulators are best able to establish the general principles for safeguarding the integrity of securities markets-cracking down on behavior against the general interest such as insider trading and promoting fair competition, whereas exchanges should be left to set the detailed rules for the day-to-day trading 4.

B. Integration of stock exchanges:

Definition Stock market integration refers to a status where investors can in one country, buy and sell without restriction, equities that are issued in another country and as a result identical securities are issued and traded at the same price across markets after adjustment for foreign exchange rates5.

The aim of the integration is actually to link stock exchanges electronically so that their members (brokerage firms) can execute orders on the stock exchange that offers the best deals for their clients. Such interlinking, would substantially increase the depth and liquidity of stock exchanges and would permit them to compete more effectively.

In the context of integration, it should be also pointed out that the concept of regionalization, arises, since only few stock exchanges in the world have the size and liquidity to be global markets. Most exchanges serve investors and issuers from surrounding regions6.

Di Noia, C, The Stock-Exchange Industry: Network Effects, Implicit Mergers and Corporate Governance, Commissione Nazionale Per Le Societa E La Borsa (CONSOB), March 1999.

Murray, A, Key Issues Facing European Securities Exchanges, Sponsored by the Federation of European Securities Exchanges, July 2002.

Pieper, P & Vogel, R, The Stock Market Integration In Latin America, CAER II Discussion Paper No. 21, Harvard Institute for International Development, October 1997.

Wellons, P, Integration of Stock Exchanges in Regions in Europe, Asia and Canada and the US, CAER II Discussion Paper No. 14, Harvard Institute for International Development, April 1998.

A regional stock market is defined to be having no specific location but is a consortium of stock exchanges within geographic proximate nations. A company located within a region should be free to issue and redeem capital via any exchange that is a member of a regional stock market7.

Regionalization, is not an alternative to having few global markets, but rather a step forward towards achieving it. Regionalization allows the integration of capital market products and infrastructure within a region, in order, that members and investors, benefit from liquidity, optimum turnover and price advantages, that bigger and wider markets provide and could then later facilitate regional exchanges in joining larger global exchanges. However, it is essential that countries evaluate regionalization on a strict cost/benefit analysis and not become overindulged in the political payoffs associated with this important decision8.

A very important issue related to the integration of stock exchanges in a region is how competition will be affected. Should stock exchanges try and specialize in different securities (as was proposed in the failed merger between London and Frankfurt Exchanges where London would specialize in blue chips companies whereas Frankfurt in high growth companies) and thus attempt to differentiate from one another. Alternatively, investors within a region should be free to trade securities on a regional stock market?

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