The missing link

By Martha Slud in New York

Last summer, a group of about 30 senior executives from stock markets throughout the Middle East gathered in New York to discuss the possibility of linking their fledgling markets to the electronically traded Nasdaq, a technology-heavy exchange that has stolen the thunder from the more staid New York Stock Exchange.

Is the idea far-fetched? It may be, financial experts say. But they also say that some sort of system in which Middle Eastern bourses are linked individually or together to a global exchange, such as the Nasdaq market, is a sound idea that could offer major positives for the region's economy. A cross-border equities trading arrangement could help boost liquidity in regional bourses - a key for emerging markets trying to increase trading in their shares - by helping encourage and simplify participation by foreign investors. Such a system could give investors throughout the Middle East easier access to shares of high-profile American technology firms traded on the Nasdaq, such as the software maker Microsoft, the semiconductor firm Intel or Yahoo!, the Internet search engine company.

Nasdaq, a subsidiary of the National Association of Securities Dealers Inc. (NASD), lists about 5,000 companies, including most of the technology-related startups that hold highly anticipated initial public offerings on Wall Street. The exchange has a larger dollar volume and trades more shares each day than the New York Stock Exchange, and recently opened a flashy market site in New York's Times Square - a clear sign of its coming of age.

First steps. The two-day, Nasdaq-sponsored talks in July did not result in any concrete plans, but officials say the exploratory gathering represented a first step toward potential cooperation between the US exchange and Middle Eastern markets. The meeting, hosted by Frank G. Zarb, Nasdaq's chairman and CEO, gathered representatives of the bourses in Cairo, Kuwait, Amman, Istanbul, Dubai, Athens, Palestine, Tel Aviv and elsewhere to discuss their market practices and strengths. The idea of Nasdaq linkage with the Middle East is one that seems to particularly appeal to the internationally oriented Zarb, who began looking into the potential of such a cross-border initiative during a visit to the region several months earlier.

The purpose of the July meeting "was for information sharing and to discuss each market's concerns, needs and visions for the future, both within their countries and as a player in what is becoming a more global marketplace," said Judith Inosanto, a Nasdaq spokeswoman in New York.

Nasdaq's global vision is to provide an opportunity for investors to trade any stock, at any time, from anywhere in the world. We are committed to making the goal of a seamless, 24-hour, global market a reality," she said. "As with any business or long-range visions, these things take time. We are looking at the opportunities that present themselves around the word, assess the stages they are in, analyze what makes the most sense and determine the best ways to move forward."

A Middle Eastern marketplace would not be Nasdaq's first foray abroad. The NASD, the exchange's parent company, is aggressively pursuing overseas opportunities, and in June launched Nasdaq Japan together with Internet investment firm Softbank. The new market, a division of the Osaka Securities Exchange, is designed as a venue for young Japanese companies to raise capital by tapping into the US investment community. After its first three months of operation, the Japanese Nasdaq exchange said it had listed 30 companies, compared with only 18 companies listed on the comparable "Mothers" market operated by the Tokyo stock exchange. For Nasdaq, it sees the benefits of such a system as helping to boost its volume and providing more trading commissions.

Elsewhere in Asia, Nasdaq is testing a limited, cross-listing arrangement on the Hong Kong stock exchange, in which local investors can purchase shares of prominent US firms such as Microsoft, biotechnology leader Amgen and Starbucks, the Seattle-based gourmet coffee chain. Plans are in the works for Hong Kong companies that currently only trade on the local exchange to be cross-listed on the Nasdaq as well.

Elsewhere, Nasdaq has launched a Canadian Nasdaq market that is similar to the Japanese model. The exchange also has been focused on building up a presence in Europe. According to published reports throughout the financial media, Nasdaq is interested in bidding for the London Stock Exchange (LSE) and has had investment bankers in London exploring the possibility of a deal for months. The London exchange recently fended off a $1.3 billion hostile takeover over bid by Sweden's OM Gruppen AB, the operator of the Stockholm stock exchange, after merger talks between the London and Frankfurt bourses fell apart.
It would not come as a big surprise if Nasdaq and the LSE do ultimately join forces.

The worldwide trend, analysts note, is for increased merger and acquisition activity among the world's bourses. Experts say that global exchanges are finding they need to link together to combat competition from new securities trading outlets, such as electronic networks. These networks have been able to gain a foothold in stock trading through technological advancements that have facilitated fast, electronic trading.

Cross-listing. Given this backdrop, it would make sense that a major global market such as Nasdaq has some designs on trading in the Middle East. For the markets of the region, the benefits of some type of a cross-listing alliance with a larger market could be extraordinary, notes Randall Dodd, the director of the Derivatives Study Center at the Economic Strategy Institute in Washington. Dodd, who has studied the issue of cross-border stock market cooperation, said such a system would allow for common clearing of trades and reduce systemic risks for foreign investors. All of that would increase liquidity for stocks in the Middle East - one of the major hurdles standing in the way of greater foreign participation in the region's exchanges.

Currently, trading in many Middle Eastern stocks is too thin to attract international investors looking to buy big stakes in local corporations. Dodd said that increased regional cooperation would improve liquidity, help channel a larger share of international capital flows to Middle East markets and thus make local markets more stable."If it brings more trading volume to, say, Egypt, that would reduce volatility," Dodd said, "because you'd have much more liquidity in the market."

One potential negative of such a linkage would be that local technology shares could be subject to the whims of the often-tumultuous Nasdaq trading cycles. The exchange had a dismal year in 2000, with its composite index of mostly technology-related shares sliding sharply from all-time highs set in the spring amid worries over US interest rate policy, a shakeout in the highflying Internet sector and slowing earnings growth for some of the bellwether stocks of the technology sector.

But aside from those limited concerns, some doubt whether a Nasdaq Middle East would ever come to pass, saying that, except for Israel, the region simply does not have enough attractive technology offerings to make cross-listing on a global exchange such as Nasdaq worthwhile. The Israeli exchange dwarfs other regional bourses, with about double the market capitalization of the Cairo Stock Exchange, for example. Already, many Israeli hi-tech companies head straight to Wall Street to make their market debuts, seeking more lucrative initial public offering deals than they could obtain through listings on the Tel Aviv exchange.
The situation, however, is much different in the Arab world, where many technology stocks are recently privatized telecom firms. For now, the innovation level of Arab technology firms has not been as fast as in Israel.

"There really aren't that many Arab technology stocks," said Steven Bregman, the manager of the Middle East Growth Fund, a US mutual fund launched in March by specialty fund firm Kinetics Asset Management. "There's maybe one company in each of these countries that could qualify."

While Israel would be a natural for a cross-listing arrangement with the Nasdaq market, any Nasdaq cooperative agreement that tries to span the entire Middle East with Israel as a central player could run into big political problems - especially in light of recent turmoil between Israel and the Palestinians. Already, there is next to no cross-trading between Israel and its Palestinian neighbors. Nor are there significant cross-listing arrangements with peace partners Egypt and Jordan. Now, especially, there would likely be some major political obstacles to getting Arab countries' shares "co-mingled" with Israeli stocks, notes Bregman.

In addition, there are also issues of how transparent the region's markets really are. Experts say problems such as insider trading on some of the region's exchanges will have to be better controlled if local markets want to attract foreign investors who have confidence in stepping into local market activity. Financial disclosure also will need to be improved.
There are technological hurdles, too, that would have to be overcome for Middle Eastern bourses to link up with a big global market. Do Arab bourses have the software and clearing systems to be able to process trades quickly enough? Analysts say that the exchanges have rapidly improved their technology, but more capital investment would certainly be required.

Bregman and other experts say that what they see as much more likely, at least in the short term, is some sort of pan-Arab exchange that would cross-list shares - meaning shares are available for purchase in more than one regional market - facilitating trading throughout the Middle East and increasing liquidity of many different types of stocks. All the markets in the region have been improving their technology, going more electronic with all kinds of market data available on the Internet, making the logistics of a cross-border arrangement all the more possible, he said.

Such a system could link the region's bigger financial markets, including Egypt and Turkey, with a major financial center such as Lebanon, as well as smaller bourses such as those in Jordan, Oman and Dubai, he said. Already, there are a number of regional investment partnerships, with expatriate capital being channeled into Lebanon and other local markets. From there, "it many not be such a stretch to cross-listing," Bregman notes. "I think this should be a goal. It should be a long-term target for the region."