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Over-regulated U.S. upstaged by 'Old Europe'

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New U.S. Regulations Push Companies to Europe

Over-regulated U.S. upstaged by ‘Old Europe’

Ten years from now the New York Stock Exchange’s (NYSE) pending $10.2 billion merger with European exchange operator Euronext will mark a watershed in the history of global investing: the birth of the world’s first global stock exchange.

Three years ago, the NYSE was the faded grande dame of stock exchanges and mired in corporate scandal. But CEO John Thain, the MIT-educated former Goldman Sachs banker, has since reinvigorated the NYSE. Nothing exemplifies this more than the NYSE’s proposed purchase of Euronext, a deal that would create the world’s largest and most liquid global securities market with combined listings of $27 trillion — more than twice the size of the U.S. economy. With joint headquarters in New York and Paris, the new NYSE-Euronext would handle about $2.1 trillion in stock trades a month, double the size of rival Nasdaq.

While Euronext doesn’t have a high profile in the U.S., NYSE-Euronext is indeed a merger of equals. Euronext is the biggest international exchange in the world and runs stock exchanges in five countries including France, the Netherlands and Portugal. It also runs the largest derivatives market (LIFFE) in the United Kingdom, making it the second-largest derivatives exchange in the world after Chicago.

Although it’s the NYSE-Euronext combination that is grabbing today’s headlines, it’s not the only global stock exchange game in town. It was scrappy Nasdaq that set off the global consolidation frenzy with its a $4.5 billion bid for the London Stock Exchange (LSE) in late March. The Nasdaq — thus far, a rejected suitor — has since acquired more than 25 percent of the LSE. But there is no doubt that Nasdaq’s moves have pressured the newly public NYSE to find a European partner, even though many thought that the NYSE, the world’s premier brand, would have been a better fit for the LSE. Not to worry though: Although the LSE has become the destination of choice for international companies, NYSE-Euronext would be a formidable competitor to London.

London Calling

So with most investors’ attention firmly focused on the fast-growth investment opportunities in Asia, why have the London and Euronext exchanges become such a hot property? Blame the overzealous U.S. government. While the world has been getting flatter, U.S. regulators have been building a brick wall around the land of the free.

Today, New York still tops the rankings as the world’s biggest financial center, and the NYSE and Nasdaq still list some of the world’s biggest companies. But for how long? In the past few years, Wall Street has become a more complex place for foreign companies to do business. Stiff regulations and the costly requirements of Sarbanes-Oxley have been chasing foreign companies across the pond and away from the NYSE and Nasdaq. Many of the hottest global companies that would have listed on U.S. markets only five years ago are headed to overseas exchanges. Even Alan Greenspan noted publicly that he was “disturbed” by the fact that initial public offerings had moved away from the U.S., largely to London.

The irony of an over-regulated U.S. being upstaged by the freewheeling and open markets of “Old Europe” is clear. With even Silicon Valley entrepreneurs flocking to London’s Alternative Investments Market (AIM) to raise capital for their U.S.-based businesses, something is amiss. And it’s not just entrepreneurs making the move: The LSE today is chock full of newly listed Chinese and Russian companies that have chosen to avoid the high cost of U.S. regulation by listing in London. Companies are voting with their feet and gravitating to London because of its more pragmatic approach to regulation, its open marketplace, and its highly skilled and international workforce.

This also means that U.S. investors like you are losing out. A concrete example? Last year, the best-performing markets in the world were in the Middle East. Yet U.S. investors missed out on these triple-digit gains completely. Not one Middle Eastern company is listed on U.S. exchanges, while the London and European exchanges boast dozens.

The Good News for You

Fortunately, the new link between the NYSE and Euronext, and perhaps Nasdaq and the LSE, is set to change this. Initially, each of the exchange’s markets would come under the jurisdiction of local regulators, largely to appease European worries about complying with excessive U.S. regulations. My prediction? Regulations acting as a millstone around the necks of U.S. exchange listed companies can’t last. The NYSE and Euronext merger is the first nail in the coffin of Sarbanes-Oxley. Even SEC chief Christopher Cox has acknowledged that global stock exchange mergers — and the changes in regulations they imply — are inevitable.

Written By

Nicolas A. Vardy is the London-based International Economics Correspondent for Human Events.

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