When Nasdaq Deutschland closes down this week, analysts say it will mark not only the end of the Nasdaq’s overseas growth plans, but also signals the demise, at least for now, of a round-the-clock global marketplace for stocks.
It was a compelling idea that was born out of the phenomenal growth in Internet-based stock trading in the 1990s.
With the prominent New York Stock Exchange in its sights, the Nasdaq sought to establish itself as the first fully-electronic global marketplace for shares, open for business 24 hours a day, and looked for partnerships and potential acquisitions in Europe and Asia.
But that once-ambitious vision crumbled earlier this month when the world’s second-biggest stock market announced plans to close its Frankfurt-based subsidiary just five months after it was launched to compete with the Deutsche Boerse, Germany’s main stock exchange with the lion’s share of equities trading.
“Perhaps their timing turned out to be very bad, but overseas expansion was a very ambitious agenda for what at the end of the day is a fairly modestly-sized company,” said Bill Cline, global managing partner for Accenture’s Capital Markets consulting practice.
“And the competition offered up by the dominant local exchanges was greater than they anticipated,” he added. Nasdaq Deutschland, for example, only managed to garner a fraction of the trading volume seen on local marketplaces and won no corporate listings.
Closure not surprising
In truth, the closure of Nasdaq Deutschland — a joint venture with Dresdner Bank, Commerzbank and the Bremen and Berlin stock exchanges — came as no surprise to investors.
Nasdaq Deutschland’s future has been uncertain ever since the Nasdaq announced plans to mothball its Nasdaq Europe division, headquartered in Brussels, last June. And in August 2002 the Nasdaq pulled the plug on Nasdaq Japan, its Japanese operation.
Large amounts of invested capital have been written off in the process.
In early August, the Nasdaq market said it lost $49 million in the second quarter ended June 30, mostly because of the costs associated with a new restructuring strategy that has included closing its European operations and the elimination of over 100 jobs.
The shuttering of Nasdaq Japan was widely seen as the reason for the Nasdaq’s 55 percent decline in second-quarter earnings in 2002, according to Reuters. And the Nasdaq expects closing its Nasdaq Deutschland operations to cost the company between $20 million and $40 million.
Nasdaq Deutschland “was part of the Nasdaq’s worldwide expansion plan that proved to be a strategic error,” remarked John Coffee, professor of securities law at Columbia University.
The Nasdaq “spent money expanding overseas and diverted attention away from its hold on the base market,” Coffee said. “It’s a tremendous loss, partly because its strategy didn’t pan out and partly because the competition took the opportunity to develop faster trading systems.”
While the Nasdaq campaigned overseas it lost a crucial battle for its home market against a new breed of electronic share-trading systems — also known as electronic communication networks, or ECNs — like Reuters Group’s Instinet, noted Coffee.
After a Nasdaq price-fixing scandal in the mid-1990s, regulators encouraged the growth of ECNs. They have since grabbed almost half the trading volume in Nasdaq-listed stocks. Competition from ECNs has helped to narrow spreads and drive down trading costs, heaping more competitive pressure on the Nasdaq market.
The Nasdaq’s response was the launch of a new trading platform, SuperMontage, which has so far failed to significantly retrieve trading volume lost to the ECNs.
Market slump hurts plan
Established in 1971 as the world’s first electronic stock market, the Nasdaq has grown into one of the world’s leading marketplaces for growing firms and now lists about 3,500 companies, including big-name technology companies like Microsoft and Cisco Systems.
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In early 2000, when the high-tech boom was in full swing and technology and dot-com shares listed on the Nasdaq market were soaring, the marketplace began to consider a plans for an initial public offering and looked set for worldwide domination.
But stock prices, particularly those of technology companies, have tumbled over the last few years, and the Nasdaq Composite index, a barometer of the performance of stocks traded on the tech-heavy Nasdaq, is down 65 percent from its March 2000 peak.
Faltering Nasdaq stocks have been de-listed from the market, cutting into fee revenue, an important source of income, and trading volume has plunged, thus reducing profits from transactions.
Now the Nasdaq has abandoned its aim to create a 24-hour, global marketplace and is pursuing slimmed-down goal of becoming the primary U.S. market for equities, an ambition the market will pursue with “maniacal focus,” according to Bob Greifeld, who took over as chief executive of the electronic market in May.
But the Nasdaq’s hasty retreat back to U.S. shores may hamper it long-term, according to Fariborz Ghadar, a professor of management at Pennsylvania State University’s Smeal College of Business.
By focusing on the U.S. market, the Nasdaq is limiting its options overseas, so that when economies recover and trading volume grows it will not have the links with other countries to attract news listings, Ghadar said.
“What the Nasdaq is doing is short-sighted,” Ghadar continued. “The strategy makes sense in the short-term, but longer term, as regional exchanges grow and form alliances they will present a challenge to the Nasdaq, so in five or six years they might need to revisit strategy their strategy and go global again.”
Global trading inevitable
Like Ghadar, Bill Cline at Accenture thinks the world’s stock markets are likely to grow and become interconnected. And like Ghadar he doesn’t think the Nasdaq is likely to hold a leadership role in that market, a vision fostered under former NASD Chairman Frank Zarb.
“It’s likely to happen at some point in the future, but not the way Nasdaq envisioned,” Cline said. “The Nasdaq tried to start from zero when it would have been easier to do this through alliances [with other stock markets].”
Other analysts, like Columbia’s John Coffee, doubt the viability of the 24-hour stock market altogether.
“The idea might come up again, but I don’t think there’s going to be a lot of demand for it until we see strong trading demand, and in that respect the Nasdaq is quite constrained,” Coffee said.
Michael Goldstein, an associate professor of finance at Babson College in Wellesley, Mass., and an economic advisor to the Nasdaq, thinks the notion of 24-hour trading is an idea ahead of its time.
“It’s a lot like the paperless office idea: It does happen slightly, but the notion that the stock market is open all the time is not something that’s likely to happen because we’re not a 24-hour society,” Goldstein said.