As each day’s headlines attest, the world’s stock exchange
business is consolidating. The NYSE has bid
for Euronext, the company that owns and operates the Paris, Amsterdam, Brussels, and
The conventional story for this consolidation seems to be
the inexorable scale economies that come from pushing more trading volume
through expensive computerized trading systems with unlimited capacity. Given the technological advances, the world’s
securities trading may be a winner-take-all market, and once the large start-up
costs of the trading infrastructure are sunk, it behooves each exchange to
gobble up as much volume as possible. For consumers, the story goes, benefits will come in the form of cheaper
trades at better prices.
This conventional story comes with a number of interesting
complications, though—economic, regulatory, and political. On the economics, while competition among exchanges to capture scale economies is surely an important impetus to consolidation, as the Economist points out, the exchanges are also coming under increasing pressure from alternative trading venues. First off, the big Wall Street firms are increasingly internalizing their crossing trades--matching buy and sell orders internally instead of sending them to the exchanges for execution. In addition, brokerage firms are registering their internal crossing networks as alternative trading systems with the SEC, thereby bringing in regulatory oversight, which allows for connections with external networks and increased liquidity. Second, over-the-counter trading via brokers is becoming more and more popular. Third, block trading by institutions is more and more being conducted over private electronic trading systems like Liquidnet and Pipeline, where anonymity is more readily available. So exchanges as a group are losing market share. Up to two-thirds of British share trading and 75% of German trading now occur off-exchange. The consolidation of exchanges turns out to be as much survival strategy as innovative cost cutting strategy.
On the regulatory side, Sarbanes-Oxley is the big gorilla everyone is trying to keep behind the closet door. The UK’s Financial Services Authority has received comfort from the SEC that a NASDAQ-LSE merger would not by itself trigger an attempt by the SEC to apply SOX or other US regulation to LSE-listed firms. SEC commissioner Anne Nazareth has been publicly commenting to similar effect, and last week, the SEC issued a blunt fact sheet stating that:
– Joint ownership of a U.S. exchange and a non-US exchange would not result in automatic application of U.S. securities regulation to the listing or trading activities of the non-U.S. exchange.
– Whether a non-U.S. exchange, and thereby its listed companies, would be subject to U.S. registration depends upon a careful analysis of the activities of the non-U.S. exchange in the United States.
– The non-U.S. exchange would only become subject to U.S. securities laws if that exchange is operating within the U.S., not merely because it is affiliated with a U.S. exchange.
This is of course no small concern. In 2000, ninety percent of the world’s IPO dollars were raised in the US; in 2005, ninety percent of the world’s IPO dollars were raised outside the US. SOX has largely been blamed for this IPO flight from the US. FSA chair Callum McCarthy did note, however, the possibility that the merged NASDAQ-LSE entity itself might seek to rationalize its regulatory structure by consolidating its operations within one jurisdiction in order to subject itself to only one regulatory regime. He went so far as to suggest the possibility that some day the LSE might not be subject to UK regulation.
On the political end, it’s not difficult to imagine the nationalistic pressures being brought to bear on these various deals. The French are keen to preserve a strong French exchange overseen by French regulators, and the NYSE promoted itself as Euronext's best merger partner for augmenting Paris as the premier European financial center. OTOH, the NYSE has also made noises about starting an new exchange in London to compete with LSE, thereby undermining its professed commitment to promoting Paris. Deutsche Borse has also found itself in political hot water over the conduct of its Euronext bid. Just the other day, DB sweetened its offer for Euronext, attempting to appease the French by promising that the office of the chairman of the supervisory board of the merged company would be in Paris, and that the merged company would use French technology for trading shares. Not only was Euronext not impressed, but German politicians and DB employees on its supervisory board moved to block attempts to shift businesses elsewhere. A politician from the German state of Hesse, DB's home state, professed that DB "has definitely gone too far," and threatened to revoke DB's license if concessions cost too many jobs in Frankfurt. Germany's minister for trade and industry noted that any deal would have to preserve "the central role of Frankfurt."
It's complicated! Stay tooned.
From its inception, the (non) application of SOX to foreign issuers has been controversial. Now the whistleblower protections of SOX have come into focus as another avenue for crossborder tensions. The ABA Journal has a nice summary of current issues. Europe, it turns out, is much less enamored of whistleblowers than we are in the States. While "Americans like to elevate whistle-blowers to near folk-here status, from Daniel Ellsberg . . . to Sherron Watkins," in Europe, whistleblowers are often thought of as informants, as rats. in Germany, "the term term most likely conjures up memories of the Gestapo . . . . In France, the term evokes images of the Vichy regime’s collaboration with the Nazis and of neighbors ratting out one another."
No wonder that the EU has had some trouble coming to terms with the application of the new Sox whistleblower provisions to its issuers crosslisted in the US--especially the requirement that issuers establish procedures to allow employees to file internal whistleblowing complaints anonymously. Europeans are apparently more concerned about the privacy and reputation of the accused. "[W]hile the Americans are most concerned with protecting whistle-blowers to ensure market integrity, Europeans place a higher premium on guarding personal reputations of targets of complaints, which sometimes arise out of spite, revenge or other suspect motives."
Well, at least about the health effects of smoking.
So say David Cutler and Edward Glaeser, economists from Harvard (paper here). The factor that best explains different smoking levels in the U.S. and Europe is the difference in beliefs about the consequences of smoking:
Public opinion surveys suggest that Americans have some of the strongest beliefs that cigarettes are extremely harmful. Furthermore, there is an extremely strong negative correlation across individuals between beliefs about the harms of smoking and smoking, and a somewhat weaker correlation between the same variables across countries....
A simple decomposition suggests that these belief differences can explain between one quarter and one-half of the difference in smoking rates between the U.S. and Europe. We present some evidence suggesting that these differences in beliefs are themselves the result of concerted government action emphasizing the harms of smoking.
Cigarettes are more expensive in Europe because of higher taxes on tobacco, so if cost were the driving force, Americans would smoke more than Europeans. Higher income levels in the U.S. might also suggest that smoking should be more popular here, as the monetary costs of smoking as a percentage of income would be lower. Then again, high income levels may cause people to quit smoking, as they have more to lose. Income levels have some explanatory value, but they are not the best predictor of smoking levels.
Regulation seems to play a role. Workplace bans raise the costs associated with smoking, and that seems to reduce consumption. But both Europe and the U.S. haves such regulations -- indeed, the authors conclude that Europe is more regulated than the U.S. in this regard, though that seems hard to believe.
In the end, the authors look to beliefs about health consequences as the most important determinant of smoking levels. This sort of evidence is startling:
Both smokers (83 percent) and non-smokers (94 percent) in the US strongly believe that smoking [is harmful to health.] By contrast, 52 percent of German smokers and 84 percent of German nonsmokers shared that belief. Beliefs appear to be specific to the society, much more than to the individual who smokes or not.
So why the difference? Perhaps public health efforts in the U.S. have been stronger than in Europe. The authors provide some interesting history of the U.S. anti-smoking campaign:
Popular knowledge about the harms of smoking almost certainly dates from Readers’ Digest, which ran an article in 1952 titled “Cancer by the Carton.” The news was picked up by other newspapers and media outlets, including even Edward R. Murrow’s (a particularly famous smoker) See It Now television program. These early reports and the related publicity created the first cigarette cancer scare in the early 1950s. The 1950s saw nascent public beliefs form about the harms of smoking. In a January 1954 Gallup survey, 41 percent of people answered ‘yes’ to the question “Do you think cigarette smoking is one of the causes of lung cancer, or not?”
... From 1933 to 1952, cigarette smoking rose every year. Indeed, between 1920 and 1952, cigarette consumption fell only during the bleakest years of the great depression (confirming the positive income elasticity of cigarette consumption at lower income levels). Between 1952 and 1954, cigarette smoking took its first dramatic drop. From 1952-1953 smoking dropped by 3 percent, followed by an additional 6 percent the following year. While it is possible that this drop was due to something other than changing beliefs about the health risks of cigarettes, contemporary observers certainly thought that the decline in smoking was the result of the health scare. For example, the treasurer of the American Tobacco Company said in 1954 that “there is a tendency to ascribe the drop in cigarette consumption almost entirely to the so called ‘cancer scare’.” (New York Times, May 7, 1954, p.35).
The reaction in the marketplace proceeded along several dimensions. On the one hand, manufacturers and the public responded by making cigarettes somewhat safer. Use of filtered cigarettes rose from less than 2 percent in 1952 to more than 20 percent in 1955. Edward R. Murrow on the air linked the rise of filtered cigarettes to heightened fears about the dangers of cigarettes. On the other hand, the cigarette industry fought back through advertising. Using their vast advertising budgets and spending on their own rival research (which unsurprisingly found that cigarettes were harmless), cigarette companies were able to overcome the negative publicity associated with these early studies. Smoking rose again from 1954 through 1963.
Increasing evidence in the medical community showed the harms from smoking, and in 1964, the Surgeon General issued his famous warning about the health consequences of smoking. In 1966, the Federal Trade Commission required cigarettes to be sold with a label warning that “cigarettes may be hazardous to your health.” Both the federal government and private groups like the American Cancer Society mounted campaigns meant to increase awareness of the health consequences of smoking. The fruits of this campaign are apparent in public opinion surveys. In 1960, 50 percent of Americans believed that cigarette smoking was one of the causes of lung cancer. By 1969, the share was 71 percent (Cutler and Kadiyala, 2003). One sees this in the consumption data as well. In 1964 alone, cigarette smoking fell by 3 percent, and smoking was down by 8 percent by 1970.
Since the 1950s, beliefs about the harms of smoking have cemented. The Gallup Organization (Gallup, 1981) documented a rising belief that smoking was dangerous. By the 1980s, Viscusi (1992) finds that people actually overestimated the health risks of smoking. As noted above, over 90 percent of Americans now believe that smoking causes cancer. A strong circumstantial case links the decline of smoking to the expansion of information about the harms of smoking. [D]ata on the share of people who have ever smoked show a decline beginning in cohorts coming of smoking age after 1964. Other evidence about the link between perception and smoking comes from individual correlations between beliefs and actions. Smoking rates among those who believe that smoking a pack or more of cigarettes per day has a great risk are only 23 percent, compared to 52 percent among those who do not believe that link. If beliefs causally affect smoking (and not the reverse, as with cognitive dissonance), it suggests a large impact of beliefs on actions.
All of this makes me wonder about the obesity problem in the U.S. The authors have another (older) paper on that. Blame your freezer, microwave, and dishwasher, they say: "technological innovations which made it possible for food to be mass prepared far from the point of consumption, and consumed with lower time costs of preparation and cleaning." Anti-obesity public health campaigns are more recent than anti-smoking campaigns, but the link between education and behavior is encouraging.
Thanks to NPR's "Talk of the Nation" for the tip.
This evening my wife was cleaning away some remnants of our summer stay in Sweden when she stumbled across a receipt for gasoline, which we acquired on one of our Saturday jaunts outside of Lund. We had purchased 44 litres (approximately 11.624 gallons) of gasoline for 481 Swedish crowns (roughly $62 at the then-prevailing conversion rate). The price per gallon: $5.33
For an interesting chart comparing weekly gas prices in six European countries and the U.S. since the beginning of 1996, see here. We shouldn't expect too much sympathy from the other side of the Atlantic.
In case you also weren't listening to the news on your way to work this morning, CNN is reporting this story:
Four explosions in London's transport system have killed at least 40 people and wounded dozens more in what Prime Minister Tony Blair said was an apparent terrorist attack. A group calling itself the "Secret Organization group of al-Qaeda Organization in Europe" claimed responsibility in a Web site posting. The authenticity of the claim could not immediately be verified.
Prayers are flying across the pond.
There's always a big fuss when the Presidency of the EU changes and this time Tony Blair's Labour Government is trying to making the most of its opportunity to set its mark on EU policy-making. There is a new White Paper on the EU. All of the big questions are on the table - including the future of enlargement, the common agricultural policy and the European social model. The White Paper seems to suggest that the UK wants to fix everything that is wrong with Europe. A big task.
The UK's Department of Trade and Industry is involved in many of the things Blair says he wants to achieve - the idea that the EU should focus on encouraging research and development and entrepreneurship is within the DTI's remit (there is to be a Council meeting on Competitiveness the week after next). And better regulation, especially better business regulation is also a matter of interest to the DTI (although financial regulation really belongs to Gordon Brown). So the DTI has some new web pages on the UK's Presidency and the DTI.
The DTI is going to work with stakeholders in trying to achieve its aims, and so links from one of its web pages to web pages about Europe for the Institute of Directors and the Confederation of British Industry. You have to hunt around a bit to find consumers but there is a Consumer and Competition Policy link. Other stakeholders don't really appear on these pages, although the DTI has some responsibilities in relation to employment and the Government wants to make sure that employees who want to will be free to work more than 48 hours per week. I guess some stakeholders have bigger stakes than others.
According to the BBC (which has a link from this page), the UK is the first EU Member State to adopt an animated logo for its Presidency of the EU. The clip shows a group of swans flying in formation from left to right of the screen. The BBC article mentions a number of possible meanings this logo might be understood to have, but does not include the possibility of a shift from left to right in political terms.
First, improving the policy making process by better consultation and Impact Assessments (which should include measuring the burden on business and testing the impact on the EU’s international competitiveness). Second, reducing the volume and complexity of EU legislation. Third, reviewing the impact and outcomes of existing legislation.
According to the UK's priorities document Better Regulation seems to be particularly relevant in the financial services context. The EU Commissioner responsible for the internal market, Charlie McCreevy, is all in favour of better regulation:
Businesses and investors alike need appropriate and efficient regulation, not over-regulation but better regulation.
Somehow I don't think the EU will be following the lead of British Columbia in developing simpler, standards-based securities regulation for a while yet (if at all). After all, the EU's not-yet-complete Financial Services Action Plan has already taken a very long time, and will be keeping a lot of lawyers in business for the foreseeable future.
The so-far bloodless revolution in Europe is roiling currency markets. The graph below shows the conversion rate of Euros per 1 U.S. Dollar. That upward leap at the end is the response to the French election, and the Dutch results will move the line even higher. It turns out that this is good news for someone about to travel to Europe.*
* The effect on Swedish crowns has exhibited a similar pattern, though somewhat less dramatic.
And the margin looks to be astronomical: 62% against and 32% for! The Netherlands is another founding country, and as I wrote in response to the French vote, "an underappreciated aspect of this story is the sense in France and in the Netherlands and elsewhere in Europe that the EU is out of control." This angle is getting some play in this morning's NYT:
Europeans are worried, among other things, that the rapid enlargement of the European Union, especially the prospect of Turkey's membership, will leave them more vulnerable to uncontrolled immigration, especially by Muslims. There is a sense, palpable in the Netherlands, that the whole European enterprise is controlled by unresponsive, unelected and unaccountable bureaucrats in Brussels who have it in their power to rob countries of their national identities.
Not to mention their social welfare programs. This is only going to become more painful. This snippet from the NYT is insightful:
The paradox here is that if the political elites and most economists are right in saying that free-market reforms and more competition are essential for these nations to match their economic competition, then the "democratic intifada" could rob the faltering core of Europe of the very means it needs to rejuvenate itself.
The tour quickly devolved into a museum tour distinguished only by its unusually horrific subject matter. You see, hear and read about, the detritus of the horror of the camps – the torture and executions, the huge piles of human hair and luggage – but it is conveyed in the manner of a museum: the tour guide’s lecture, captioned photographs and selections of real artifacts inside glass cases. And not a particularly well-presented museum at that: I’ve seen half a dozen museum exhibitions of the holocaust that moved me more. The Holocaust Museum in Washington, D.C. was a far more powerful experience.
I had exactly the same
reaction. The tour was so sanitized and so
remote. So unlike the moving experience I thought it would be. I cried at the Holocaust Museum and got frustrated at
Auschwitz ... until the gas chamber, which was genuine and heart-breaking. Oscar recounts his experience:
Auschwitz had one gas chamber – a prototype for the larger ones that would be installed in the later death camps – and it survived the war. The attached crematorium, where the bodies of those killed by the poison gas were incinerated, was destroyed by the Nazis in their coverup effort as they retreated from Poland; but the Museum has realistically restored it using original materials.
We lined up outside, and then filed into the gas chamber, as millions of people had done as the last act of their lives. In that moment, I felt all the layers of thought that protect me from shameful feelings – the evaluative, judgmental, humorous, cynical, angry layers of thought – stepped aside. There was nothing but to feel “I am here, now.”
I’ve not had that many moments of such unfiltered experience. This one took the shape of a single sob.
Having been separated from my tour group, I saw the gas chamber alone. Five minutes alone in the gas chamber. I tried to imagine what had happened there. The faces and bodies, the sounds and smells. I imagined the young guards shouting at the prisoners. Then I left the gas chamber and rejoined my family, who were waiting under the gate proclaiming Arbeit Macht Frei.
France is divided into 22 regions, which are further divided into departments. This map shows the vote by department.
France's rejection of the European Constitution looks like a vote of fear. According to David Ignatius:
France's stunning rejection Sunday of a new European constitution was, most of all, a noisy protest against the disruptive, leveling force of economic globalization. You could see that in television images of the "no" voters as the result was announced -- burly arms raised in the air, fists cocked -- as if by rejecting a set of technical amendments to European rules they could hold back a threatening future.
Yes, anti-globalization forces are strong in France, but there is more to this story, including the passionate feelings against Chirac. Perhaps an underappreciated aspect of this story is the sense in France and in the Netherlands and elsewhere in Europe that the EU is out of control. With 25 member states, it seems less manageable than ever before. And more distant from the people. For the Non voters in France yesterday, rejection of the European Constitution must feel good. Democracy usually does, and the people of Europe rarely feel that in their dealings with the European Union.