A single global stock market is now one step closer to reality. The merger of the London stock exchange and Frankfurt's Deutsche Börse might be a blow to the former but that's no reason to stand in the way of globalisation.
The iX is a great idea in theory. A combination of the world's third and fourth largest stock markets will not displace Japan from second slot but will prove an irresistible draw for all other European exchanges. The rest of Europe is already clamouring for seats at the negotiating table.
A stock exchange should exist to provide low cost, efficient capital-raising and share-dealing services under a rigorous, fair and transparent regulatory umbrella. Substantial economies of scale should exist in both service-provision and regulation. And investors and issuers alike should welcome harmonised trading practices.
The global investment banks have pushed hardest for the London-Frankfurt merger - no surprise there, as their geographical reach and cross-border expertise will give them an edge over purely domestic competitors. Also, their transaction volumes are such that even minor economies of scale could have a very material impact on their profitability.
If the benefits of scale are so obvious to the exchanges' major players, one might ask why an iX, or some similar vehicle, has not been engineered earlier. The answer lies in new technologies.
Not only has the technology revolution facilitated the demise of physical exchanges and the creation of virtual market places, but also new technology companies are usually regarded as independent of geography. Just as their products are sold without borders, so their capital-raising is, too. Their advisers will take them to market wherever costs are low and investor impact high.
The plans for iX reflect the increasing homogeneity of market practices in a finan cial world dominated by a few truly international investment banks. What these banks have thus far failed to secure, however, is an elegant structure for the new exchange. And herein lies all the risk to its future success.
It is proposed that the shares of the largest British and German companies are traded on a platform run and regulated inLondon, while the new economy stocks are traded on a Frankfurt-based platform. In both cases the trading systems are likely to closely mirror the existing Frankfurt models. But this twin structure appears to be more concerned with resolving the political problems inherent in the merger than designing a world-beating exchange. Two centres, parallel systems, a divided regulatory regime: a recipe for unnecessary costs and confusions.
This leaves aside the question of cultural compatibility. Anglo-German mergers have a rich history of malice and misunderstandings. Far better, surely, an outright takeover of one exchange by another, for then clear-cut decisions could be taken and implemented.
The London exchange's recent history meant there was little chance it could play the dominant role in the discussions and the iX proposals laid bare the weakness of its negotiating position.
Many are tracing this weakness to the 1998 introduction of Sets, the trading system for large companies. While Sets has proved controversial, particularly with private client brokers who beef about a drop in market liquidity, it is by no means certain that the German trading platform is superior.
Others cite the collapse of London's trading system on April 5 this year as tipping the negotiating balance. But, again, this view is one-eyed. Even the mighty American exchanges have been known to suffer computer hiccups.
I prefer to trace the London exchange's weak position to its failure to respond swiftly and effectively to the development of the Neuer Markt - Germany's exchange for new technology stocks. The UK's Techmark, belatedly launched last autumn, may prove very short-lived. In this revolutionary world, it is perilous to be a Luddite.
One aspect of the merger has been seized on by the popular press as a symbol of London's defeat and of the inefficiencies inherent in the proposal - the eventual switch to trading all British shares in euros.
It is by no means clear that UK companies will be forced to report in euros and to have their shares traded in euros. Indeed, the press's reaction may force the LSE to backtrack. The reality is, however, that there is no more need for a country to have its own stock exchange than to have its own national airline. But try telling the europhobes that.
Edmond Warner is chief executive at Albert E Sharpe Securities
