Marcus Cake

There is competition amongst stock exchanges, but I am intrigued by the small market share of listed companies of the offshore stock exchanges. The internet would appear to facilitate greater participation in the “listed company” market by the offshore stock exchanges. Offshore centres also hold between 33-40% of the worlds financial assets and the costs of lising offshore are a fraction of onshore exchanges.

Stock exchanges are consolidating. Nasdaq has aquired a quarter of the London Stock Exchange, and NYSE has announced a merger with Euronext. A combined NASDAQ / London Stock Exchange represents 15% of the number of global listed companies and 14.7% of global market capitalisation. A combined NYSE / Euronext represents 8.5% of the number of global listed companies and 25.7% of global market capitalisation. These are the front-runners in the race to become a global stock exchange. To learn more about changes in the market, please read my other articles, NYSE may announce merger with Euronext / NASDAQ has acquired one quarter of the London Stock Exchange and Financial markets are about to enter a transformational phase .

The primary activity of a stock exchange has been order execution, the matching of buyers and sellers of shares, usually through closed dealer networks in specific countries. Greater competition from electronic contract networks and cheaper technology has significantly reduced the fees associated with buying and selling shares. The emergence of a global stock exchange is highly anticipated. The typical view being that global order execution could be handled by a single, or few, exchanges. Where will such an exchange come from? Offshore or onshore?

In 1999, the following predictions were made:

“In the New Reality a complete minnow of a stock exchange will grow to be a world player. It will be an offshore market and it may be in Bermuda, Jersey or Singapore, or even a yet to be established cyberspace market with nominal geographic presence in Andorra or Monaco, or perhaps a financial center within a high tax jurisdiction, such as the Irish Republic; or perhaps a state yet to achieve independence. Remember, in the Capital Markets Revolution the status quo no longer exists.” …

“In the Capital Markets Revolution the capacity of digital technology to bring together all fixed points to another fixed (or indeed floating) point means that technology of the internet generation will decimate the world’s existing stock exchanges. Fewer than five major stock markets will remain by 2010. Perhaps two or three of these will be entirely electronic markets which have not yet been created.”- Patrick Young et al, “Capital Markets Revolution”, 1999, p. 53, 47.

Offshore was considered the most likely place for the five major stock exchanges that may exist by 2010. This has not occurred in the last few years. The forecast change is either delayed or will not occur at all. Most believe the change is delayed. The forecast assumed that more than 50% of the industry would lose their jobs within five years. This type of employment shift would generally occur over a much longer period.

The stock exchanges located in major population centres have achieved a critical mass of advisers, companies and investors. This may be due to having a large captive population. It can cost US$750,000+ to list a company on a stock exchange. This is a high price to pay for order execution and no certainty of investor capital or liquidaity. Many small to medium sized enterprises can not afford listing on major exchanges. Those that do list, often do not have liquidity or consistent availability of capital to grow their businesses. Compliance costs in the major onshore centres has spiralled upwards. High profile corporate failures have resulted in greater regulation and control. The introduction of the Sarbanes-Oxley Act in the United States in meant to have added millions to the cost of listings and may have contributed to less companies being listed in the US ( See Stock exchanges: large exchanges in decline?, niche exchanges growing. The introduction of Sarbanes-Oxley in the United States and, but the costs of listing and professional services is high. The more regulation and compliance cost, the ability of “growth” companies to access the equity market is reduced. Does the current system of compliance and regulation mean that “growth” companies can not get capital for growth?

It costs a fraction to list on offshore exchanges. Most offshore exchanges accept the listing of companies based in other countries. They are, quite simply, offering a simple service of matching buyers and sellers. Offshore stock exchanges have not achieved critical mass, but have more flexible corporate law and less expensive stock exchange listings. This may be a result of not having a captive population in a local geographic area. As a result, the equity market has liqudity in the major population centres. Offshore centres offer less costs, but non-existant liquidity. If a company can not get liquidity, there is no advantage to listing - offshore or onshore.

A stock exchange is not responsible for the liquidity of a company’s securities. A company is responsible for its own liquidity. It is the company’s responsibility to communicate with buyers and sellers of the company’s equity, in much the same way as they much reach customers for their product or service. How does a company get large if it can’t raise capital? How many companies simply fail because they can not access capital markets? What contribution could new companies make to the future living standards of each society?

The equity market may find an economic way to provide capital to these “growth” companies. In the internet era, the offshore jurisidictions and stock exchanges may offer specific types of companies, less listing costs, greater flexibility to raise capital and a better opportunity to build shareholder value.

A number of offshore stock exchanges have specific offerings to earlier stage companies. “The BSX Mezzanine Market offers growing E-commerce, high tech and development stage companies the opportunity to list on a recognized international stock exchange at a much earlier stage than is currently possible in any other jurisdiction. This is due in large part to the fact that the BSX restricts Mezzanine Market investment to “Qualified Investors”. The BSX calls this new market “The New Silk route for the 21st century“. There are other offshore stock exchanges which offer specific markets for “growth” companies. These includes Singapore’s SESDAQ , Hong Kong’s Growth Enterprise Market, Luxembourg and Jersey . Many “growth” companies on these markets do suffer from a lack of liquidity and limited local analysts and advisers to provide market support.

In the next few weeks, I plan to do some further research into specific offshore stock exchanges to provide detailed insight into their offerings for earlier stage companies.