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STOXX change, Archipelago and Virt-x The Shape Of Things To Come?

Jason Gorringe, Tax-news.com, London

17 July 2000

Two significant developments on the fringes of Europe's equity markets last week pointed the way towards a future which may become increasingly uncomfortable for the established country-based stock markets.

First, Dow Jones index company Stoxx shocked the European markets last week by announcing a change in the way it compiles its Euro Stoxx indices. From September Stoxx will weight companies by 'free float', that is, the amount of a company's stock that is actually available to be traded.

Dow Jones reasoning is that for a very large company with a limited free float (eg Deutsche Telekom) pressure from the ever-more-popular index tracking stocks to match a high component ranking from a small basket of available shares drives up share prices to an unrealistic level. That is probably true, and the change is appropriate; but if the result is to remove one cause of volatility from 'tracked' shares then index-tracking will become even more popular, and so will its surrogate companions such as spread betting and contracts for differences. If it is easy to match the behaviour of an index, then why bother to buy the component stocks?

It remains to be seen whether MSCI and FTSE, both more important than STOXX at present, make the change.

Meanwhile, the march of the ecn's accelerated after Tradepoint's link-up with the Swiss Stock Exchange to form Virt-x, when Archipelago, Chicago-based electronic market, and the Pacific Exchange announced a possible link to Virt-x.

Archipelago and the Pacific Exchange have completed technical links, and are awaiting regulatory approval which will allow them to begin trading Nasdaq, Big Board and American Stock Exchange issues later this year.

If Archipelago and Virt-x linked up, and were given regulatory approval, which is probably more likely than not, they would be able to offer the big traders such as Goldman Sachs and Merrill Lynch the critical mass they have been waiting for from the ecn's, and the treasured liquidity which supports the 'legacy' exchanges might begin to drain away to the new kids on the block.

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