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Home  >  Fundamental analysis  >  World exchanges  >  EURONEXT, the first pan-European Exchange


EURONEXT, the first pan-European Exchange



Originally Londons main exchange for trade in financial derivatives (futures and options), the London International Financial Futures and Options Exchange began trading in derivatives in 1982, expanding to include markets in equity options and a range of commodity contracts. Derivatives are financial devices that help organisations and individuals decrease their exposure to risk. For example, a chocolate or sugar manufacturer may buy futures in their raw materials to remove the risk of strong price fluctuations. Called derivatives because they are derived from something else, they cover commodities (such as wheat, cocoa or coffee); interest rates; equities; and currencies.

Initially, the exchange traded derivatives through open outcry but soon developed an advanced computer-based trading system called Connect, which gave international traders instant access.

Like the LSE, LIFFE became a public limited company and in 2002 was taken over by Euronext, which also owns exchanges in Amsterdam, Brussels, Paris and Lisbon. The derivatives market is sizeable. Trading on Euronext/LIFFE is worth around $884 billion per day. London maintains a $275 billion daily turnover in 'over the counter' derivatives, which is 36% of the global market.

Created in September 2000 by the merger of the Amsterdam, Brussels and Paris markets, Euronext is one of the worlds newest exchanges and the first pan-European exchange. Its 2002 acquisition of the London International Financial Futures and Options Exchange (LIFFE) signaled the direction that other exchanges may follow: cross-border markets with multiple products seamlessly traded on a single platform.

In 2004 Euronext completed the integration of all its marketsincluding the Lisbon bourse that was acquired in 2001and may be ready for another acquisition: the prestigious London Stock Exchange (LSE).

Euronext has created a single market for cash products by making all its listed stocks available on a single trading platform, NSC, and clearing through a single system. Euronext.liffe achieved a similar model for derivatives, by bringing all its derivatives products on a single electronic trading platform, LIFFE CONNECT.

Euronext Amsterdam

Amsterdam became an important financial center soon after seven Dutch provinces united and declared independence from Spain in 1579.

A goods and financial exchange, the Amsterdam Bourse brought a number of innovations, such as the listing of insurance policies covering risky ocean trade, which was expanding to the far shores of the New World. Banking, no longer dominated by the Italians who had suffered several bankruptcies, flourished in Amsterdam in tandem with the stock exchange.

Another innovation was the foundation of the Dutch East India Company or VOC in 1602 and the first organized issuance of shares by a company. For this reason, Amsterdam is regarded as the first true equities exchange, in contrast with its predecessors that traded various securities. Investors appetite for the VOC shares pushed the stock up 12 fold and helped create options and futures on the coveted stock, thus laying the foundation for Amsterdam as a derivatives market.

In modern times, the Amsterdam Stock Exchange Association was founded in 1851 to regulate stock trading. It required membership to trade on its floor. In 1997, the Association abandoned its membership model and merged with the European Options Exchange, launched in 1978 to emulate the Chicago Board Options Exchange.

The new company, Amsterdam Exchanges, operated both equity and derivatives markets and consolidated clearing, settlement and depository services. The new structure paved the way for the Euronext merger.

Euronext Brussels

Belgium was the cradle of the first securities markets, starting with Bruges, due to Flanders prominent role in international trading in the Middle Ages. The Antwerp Stock Exchange was the worlds first building specifically erected to house securities trading in 1531.

Although Belgium gained its independence in 1831, the countrys financial system retained the French model: brokers were officials controlling government securities trading and could not engage in proprietary trading. Belgiums financial industry was deregulated in 1867 and another milestone was achieved a century later with the Financial Transactions and Markets Act of 1990 to modernize the countrys capital markets.

In 1999, a royal decree created the Brussels Exchanges (BXS), a corporation operating the Bourse de Bruxelles, the Belgian Futures and Options Exchange or Belfox, and the central securities depository or CIK. It was a crucial step toward the Euronext merger a year later.

Euronext/LIFFE

The lifting of foreign exchange controls in Britain led to the creation of the London International Financial Futures and Options Exchange (LIFFE) in 1982 to help investors manage currency and interest rate volatility.

Through the acquisition of the London Traded Options Market (LTOM) in 1992 and of the London Commodity Exchange (LCE) in 1996, LIFFE added equity derivatives and commodities. A pit-based exchange, LIFFE started developing electronic trading in 1998 but it was too late to stem the onslaught of its young virtual competitor, Eurex, which snatched trading in flagship German bund contracts away from London.

By June 2000, the derivatives exchange was trading all its products on the LIFFE CONNECT platform. It changed its corporate structure to become a for-profit entity. Euronext bought the derivatives market in 2002.

Euronext Lisbon

A European seaborne power along with Spain, Portugals involvement in the conquest of the New World was limited by its small population of just one million at the beginning of the Renaissance.

Nevertheless, Portugal was geared toward international trade and a group of local merchants, the Businessmens Assembly, created the Lisbon Exchange in 1769. The Porto Stock Exchange followed nearly a century later.

In 1992, the Lisbon Stock Exchange Association and the Porto Stock Exchange Association were organized as non-profit institutions, with cash transactions handled by Lisbon and derivatives by Porto. They merged in 1999 and were acquired by Euronext in 2002.

Euronext Paris

Before the Dutch East India Company started issuing shares, there had been several attempts at raising funds to finance business development throughout Europe.

One early example was the Societe des Moulins du Bazacle [Bazacle Mills Co.] that floated 96 shares in 1250 in Toulouse, France. The stock remained quoted under another name until 1946.

Emulating trade centers in Bruges and Antwerp, Lyons created the first French bourse in 1540. The French were eager to regulate securities trading early on, with a royal edict governing financial intermediaries being issued in 1572. But Paris, the capital, did not have a bourse until 1684, highlighting Frenchmens traditional distrust for financial instruments.

John Law, a Scottish adviser to the King, confirmed their worst fears when he introduced paper money issued by the Banque Royale in 1716 and floated shares in the Compagnie des Indestwo experiments that ended in bankruptcies and gave bank a bad name in France.

Paris first stock exchange was created in 1724 but the French financial system remained anemic until Napoleon created a central bank, issued banknotes, regulated brokers and opened a new Paris Bourse in 1801. Always eager to clearly assign duties, the French can be credited for inventing the upstairs market and the over-the-counter market, nicknamed the wet feet because its brokers convened in open air, no matter the weather.

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