The consolidation of Europe's stock exchanges seems to be hotting up as the continent's two largest exchanges - London and Frankfurt - face increasing difficulties in consummating their proposed merger.
The respective boards of the London Stock Exchange (LSE) and Frankfurt's Deutsche Borse are proposing to merge to form the succinctly titled iX exchange. As part of the process, in the runup to the merger, shares in the LSE were distributed among the member firms and are now traded in an unofficial market run by Cazenove. Shares have been trading actively as some financial institutions such as the Guinness Peat Group have purchased stakes.
Over the past week OM Group, the Swedish company that controls the Stockholm stock exchange, announced that it was working on making a hostile bid for the LSE. This has raised doubts as to whether the merger, which hoped to create a single Europe-wide platform for trading and settlement, will ultimately succeed.
In the meantime, the advent of the Internet has enabled online brokers to grab an increasing share of the trading activity of private investors. In particular, German online brokers, such as Consors and Comdirect, have grown very rapidly and account for more than 50 per cent of the European online broking market.
Like their American counterparts such as E-Trade and DLJDirect, European online brokerages saw huge trading volumes as the market for technology, media and telecoms (TMT) stocks reached a peak in February and March of this year.
Many investors bought shares in these online broking stocks viewing them as providing exposure to new technology and the growing equity culture across Europe. The ensuing bear market in the once high-flying TMT stocks led to a plunge in the share prices of these online brokerages. American firms suffered particularly badly as competition from established financial services companies also intensified.
US stocks have come off the bottom recently on speculation that the giant American Express or some other financial institution was about to launch a takeover bid.
German online brokerages have done somewhat better underpinned by the strength of Germany's high-growth Neuer Markt and some large initial public offerings (IPOs) such as semiconductor company Infineon and Internet service provider TOnline.
In the first six months of this year another 1.2 million trading accounts were opened with German brokerages. More IPOs, such as that for Deutsche Post, will continue to stoke Germany's equity culture. However, this might not be enough to lure investors into buying online brokerage shares. Price competition and high marketing costs are likely to continue to be factors acting as a deterrent to underlying profitability.
Furthermore, established financial services firms, such as banks and incumbent brokerages, are actively developing their online offerings across a broad spectrum of financial services including online share trading.
The specialist online brokerages have recognised that, on its own, online share trading is a very narrowly focused service. Therefore these firms are actively seeking to broaden the range of services that they offer by introducing insurance and other asset management services.
It does seem likely that the majority of successful new brokerage firms will eventually become part of a larger financial group or, alternatively, will have broadened out their services so that share trading has become part of a wider financial services business.
For private investors any investment in brokerages would have to be viewed as high risk. It may well be a better strategy to take advantage of the lower dealing costs offered by these firms to invest in a selection of established quoted financial services shares.
