Топик: Stock market

Now we can return to the table. The P-E ratio for each stock is based on the latest price of the stock and on earnings for the latest reported 12 months. The multiples, as you can see, were 12 for Con Edison, 17 for GE, and 10 for Mobil. In January 1987, the average multiple for all stocks was very roughly around 15. Con Edison is viewed by investors as a relatively good-quality utility company, but one that by the nature if its business cannot grow much more rapidly that the economy as a whole. GE, on the other hand, is generally given a premium rating as a company that is expected to outpace the economy.

You can't buy a stock on the P-E ratio alone, but the ratio tells you much that is useful. For stocks where no P-E ratio is shown, it often means that the company showed a loss for the latest 12 months, and that no P-E ratio can be calculated. Somewhere near the main NYSE table, you'll find a few small tables that also relate to the day's NYSE-Composite trading. There's the table showing the 15 stocks that traded the greatest number of shares for the day (the "most active" list), a table of the stocks that showed the greatest percentage of gains or declines (low-priced stocks generally predominate here); and one showing stocks that made new price highs or lows relative to the latest 52 weeks.

You'll find a large table of "American Stock Exchange Composite Transactions", which does for stocks listed on the AMEX just what the NYSE-Composite table does for NYSE-listed stocks. There are smaller tables covering the Pacific Stock Exchange, Boston Exchange, and other regional exchanges.

The tables showing over-the-counter stock trading are generally divided into two or three sections. For the major over-the-counter stocks covered by the NASDAQ quotation and reporting system, actual sales for the day are reported and tabulated just as for stocks on the NYSE and AMEX. For less active over-the-counter stocks, the paper lists only "bid" and "asked" prices, as reported by dealers to the NASD.

It is worth becoming familiar with the daily table of prices of U.S. Treasury and agency securities. The Treasury issues are shown not only in terms of price, but in terms of the yield represented by the current price. This is the simplest way to get a bird's-eye view of the current interest rate situation—you can see at a glance the current rates on long-term Treasury bonds, intermediate-term notes, and short-term bills.

Elsewhere in the paper you will also find a large table showing prices of corporate bonds traded on the NYSE, and a small table of selected tax-exempt bonds (traded OTC). But unless you have a spe­cific interest in any of these issues, the table of Treasury prices is the best way to follow the bond market.

There are other tables listed. These are generally for more experi­enced investors and those interested in taking higher risks. For example, there are tables showing the trading on several different exchanges in listed options—primarily options to buy or sell common stocks (call options and put options). There are futures prices— commodity futures and also interest rate futures, foreign currency futures, and stock index futures. There are also options relating to interest rates and options relating to the stock index futures.

6. EUROPEAN STOCKMARKETS–GENERAL TREND

Competition among Europe’s securities exchanges is fierce. Yet most investors and companies would prefer fewer, bigger markets. If the exchanges do not get together to provide them, electronic usurpers will.

How many stock exchanges does a Europe with a single capital market need? Nobody knows. But a part-answer is clear: fewer than it has today. America has eight stock exchanges, and seven futures and options exchanges. Of these only the New York Stock Exchange, the American Stock Exchange, NASDAQ (the over-the-counter market), and the two Chicago futures exchanges have substantial turnover and nationwide pretensions.

The 12 member countries of the European Community (EC), in contrast, boast 32 stock exchanges and 23 futures and options exchanges. Of these, the market in London, Frankfurt, Paris, Amsterdam, Milan and Madrid–at least–aspire to significant roles on the European and world stages. And the number of exchanges is growing. Recent arrivals include exchanges in Italy and Spain. In eastern Germany, Leipzig wants to reopen the stock exchange that was closed in 1945.

Admittedly, the EC is not as integrated as the United States. Most intermediaries, investors and companies are still national rather than pan-European in character. So is the job of regulating securities markets; there is no European equivalent of America’s Securities and Exchange Commission (SEC). Taxes, company law and accounting practices vary widely. Several regulatory barriers to cross-border investment, for instance by pension funds, remain in place. Recent turmoil in Europe’s exchange rate mechanics has reminded cross0border investors about currency risk. Despite the Maastricht treaty, talk of a common currency is little more than that

Yet the local loyalties that sustain so many European exchanges look increasingly out-of-date. Countries that once had regional stock exchanges have seen them merged into one. A single European market for financial services is on its way. The EC's investment services directive, which should come into force in 1996, will permit cross-border stockbroking without the need to set up local subsidiaries. Jean-Francois Theodore, chairman of the Paris Bourse, says this will lead to another European Big Bang. And finance is the multinational business par excellence: electronics and the end of most capital controls mean that securities traders roam not just Europe but the globe in search of the best returns.

This affects more than just stock exchanges. Investors want financial market that are cheap, accessible and of high liquidity (the ability to buy or sell shares without moving the price). Businesses, large and small, need a capital market in which they can raise finance at the lowest possible cost If European exchanges do not meet these requirements, Europe's economy suffers.

In the past few years the favoured way of shaking up bourses has been competition. The event that triggered this was London's Big Bang in October 1986, which opened its stock exchange to banks and foreigners, and introduced a screen-plus-telephone system of securities trading known as SEAQ. Within weeks the trading floor had been abandoned. At the time, other European bourses saw Big Bang as a British eccentricity. Their markets matched buy and sell orders (order-driven trading), whereas London is a market in which dealers quote firm prices for trades (quote-driven trading). Yet many continental markets soon found themselves forced to copy London's example.

That was because Big Bang had strengthened London's grip on international equity-trading. SEAQ's international arm quickly grab­bed chunks of European business. Today the London exchange reckons to handle around 95% of all European cross-border share-trading It claims to handle three-quarters of the trading in blue-chip shares based in Holland, half of those in France and Italy and a quarter of those in Germany—though, as will become clear, there is some dispute about these figures.

London's market-making tradition and the presence of many international fund managers helped it to win this business. So did three other factors. One was stamp duties on share deals done in their home countries, which SEAQ usually avoided. Another was the shortness of trading hours on continental bourses. The third was the ability of SEAQ, with market-makers quoting two-way prices for business in large amounts, to handle trades in big blocks of stock that can be fed through order-driven markets only when they find counterparts.

A similar tussle for business has been seen among the ex­changes that trade futures and options. Here, the market which first trades a given product tends to corner the business in it. The European Options Exchange (EOE) in Amsterdam was the first derivatives exchange in Europe; today it is the only one to trade a European equity-index option. London's LIFFE, which opened in 1982 and is now Europe's biggest derivatives exchange, has kept a two-to-one lead in German government-bond futures (its most active contract) over Frankfurt's DTB, which opened only in 1990. LIFFE competes with several other European exchanges, not always successfully: it lost the market in ecu-bond futures to Paris's MATIF.

European exchanges armoured themselves for this battle in three ways. The first was to fend off foreign competition with rules. In three years of wrangling over the EC's investment-services directive, several member-countries pushed for rules that would require securities to be traded only on a recognized exchange. They also demanded rules for the disclosure of trades and prices that would have hamstrung SEAQ's quote-driven trading system. They were beaten off in the eventual compromise, partly because governments realized they risked driving business outside the EC. But residual attempts to stifle competition remain. Italy passed a law in 1991 requiring trades in Italian shares to be conducted through a firm based in Italy. Under pressure from the European Commission, it may have to repeal it.

6.1 New Ways for Old

The second response to competition has been frantic efforts by bourses to modernize systems, improve services and cut costs. This has meant investing in new trading systems, improving the way deals are settled, and pressing governments to scrap stamp duties. It has also increasingly meant trying to beat London at its own game, for instance by searching for ways of matching London's prowess in block trading.

Paris, which galvanized itself in 1988, is a good example. Its bourse is now open to outsiders. It has a computerized trading system based on continuous auctions, and settlement of most of its deals is computerized. Efforts to set up a block-trading mechanism continue, although slowly. Meanwhile, MATIF, the French futures exchange, has become the continent's biggest. It is especially proud of its ecu-bond contract, which should grow in importance if and when monetary union looms.

Frankfurt, the continent's biggest stock-market, has moved more ponderously, partly because Germany's federal system has kept regional stock exchange in being, and left much of the regulation of its markets at Land (state) level. Since January 1st 1993 all German exchanges (including the DTB) have been grouped under a firm called Deutsche Borse AG, chaired by Rolf Breuer, a member of Deutsche Bank’s board. But there is still some way to go in centralizing German share-trading. German floor brokers continue to resist the inroads made by the bank’s screen-based IBIS trading system. A law to set up a federal securities regulator (and make insider-dealing illegal) still lies becalmed in Bonn.

Other bourses are moving too. Milan is pushing forward with screen-based trading and speeding up its settlement. Spain and Belgium are reforming their stock-markets and launching new futures exchanges. Amsterdam plans an especially determined attack on SEAQ. It is implementing a McKinsey report that recommended a screen-based system for wholesale deals, a special mechanism for big block trades and a bigger market-making role for brokers.

Ironically, London now finds itself a laggard in some respects. Its share settlement remains prehistoric; the computerized project to modernize it has just been scrapped. The SEAQ trading system is falling apart; only recently has the exchange, belatedly, approves plans draw up by Arthur Andersen for a replacement, and there is plenty of skepticism in the City about its ability to deliver. Yet the exchange’s claimed figures for its share of trading in continental equities suggest that London is holding up well against its competition.

Are these figures correct? Not necessarily: deals done through an agent based in London often get counted as SEAQ business even when the counterpart is based elsewhere and the order has been executed through a continental bourse. In today’s electronic age, with many firms members of most European exchanges, the true location of a deal can be impossible to pin down. Continental bourses claim, anyway, to be winning back business lost to London.

Financiers in London agree that the glory-days of SEAQ’s international arm, when other European exchanges were moribund, are gone. Dealing in London is now more often a complement to, rather than a substitute for, dealing at home. Big blocks of stock may be bought or sold through London, but broken apart or assembled through local bourses. Prices tend to be derived from the domestic exchanges; it is notable that trading on SEAQ drops when they are closed. Baron van Ittersum, chairman of the Amsterdam exchange, calls this the “queen’s birthday effect”: trading in Dutch equities in London slows to a trickle on Dutch public holidays.

Such competition-through-diversity has encourage European exchanges to cut out the red tape that protected their members from outside competition, to embrace electronics, and to adapt themselves to the wishes of investors and issuers. Yet the diversity may also have had a cost in lower liquidity. Investors, especially from outside Europe, are deterred if liquidity remains divided among different exchanges. Companies suffer too: they grumble about the costs of listing on several different markets.

So the third response of Europe’s bourses to their battle has been pan-European co-operative ventures that could anticipate a bigger European market. There are more wishful words here than deeds. Work on two joint EC projects to pool market information, Pipe and Euroquote, was abandoned, thanks mainly to hostility from Frankfurt and London. Eurolist, under which a company meeting the listing requirements for one stock exchange will be entitled to a listing on all, is going forward–but this is hardly a single market. As Paris’s Mr Theodore puts it, "there is a compelling business case for the big European exchanges building the European-regulated market of to-morrow" Sir Andrew Hugh-Smith, chairman of the London ex­change has also long advocated one European market for profes­sional investors