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German Stock Exchanges Join Under One Roof

They intend to challenge the dominance of London's financial and trading capabilities

GERMANY'S financial community is hopeful that a consolidation of the country's fragmented stock exchanges will make Frankfurt a stronger financial center in the new Europe.

"In 1989-90 we went through a period of political unification. Now we're unifying the financial markets," says Rolf Weichert, director of the Frankfurt Stock Exchange.

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This week the Frankfurt exchange and its seven smaller sister exchanges across Germany agreed to consolidate within a single privately owned holding company that will include the stock exchanges, the options and futures market, and their supporting systems under one roof.

Officials here are hopeful that the new agreement, to take effect in January, will strengthen Germany against archrival London. London handles about half again as much share business as Germany's eight exchanges. A particular concern is that up to 10 percent of the trading in some large German companies is routinely done through London. Strength in unity

The agreement on the new company, to be called Deutsche Borse AG, took years of negotiations. The agreement seems to reflect a recognition by the smaller exchanges that if they don't hang together, they will hang separately, as Benjamin Franklin might have put it - and business will go elsewhere.

The smaller exchanges will retain a certain independence: They are to get 10 percent of the new holding company among them, and four seats on a newly enlarged supervisory board. Some observers suggest that this might be just enough to ensure that some lingering tension will remain between Frankfurt and the smaller seven. Likewise, part of the deal with the smaller exchanges was a firm commitment to floor trading as well as electronic trading; some see potential friction there.

But even the smaller exchanges are learning to love the new technologies. Ibis, the Frankfurt exchange's electronic trading system for the 30 blue chips making up the DAX (Deutsche Aktienindex or German Stock Index) now provides considerable business for the smaller exchanges. On the other hand, Mr. Weichert notes, half the turnover in DAX companies in Hanover and Munich comes directly through Ibis, bypassing the local exchanges.

Ibis is also getting a foot in the door in London. London has one Ibis terminal already, in a local branch of a German bank. "We see tremendous interest in London," Weichert says. New door to Europe

London has traditionally been the gateway for American and Japanese money going to Europe. "But with the change in the political scene, we expect that over the next 10 years the capital flow will be from western Europe to eastern and central Europe," Weichert says.

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German stock-exchange officials are proud of their quick clearing time: Their customers can trust that if they sell a stock on Monday, the money will be in their account on Wednesday. The international standard, by contrast, is five days. "It's a reliable, very quick system, but oriented toward the domestic market," says Weichert. "We want to see whether this can be done within a European market."

The German exchanges still do not do a great deal of business in international stocks; they handle them as a convenience to private investors. Institutional investors in Germany tend to "go to the home market" to buy foreign stocks.

Frankfurt is looking over its shoulder for potential competitors: "Reuters has started with the development of [an electronic] dealing system," Weichert says. "They have no relevant market share; they are in a test phase. But we see them in the long term as a serious competitor."

Germany is still seen to need some legal changes before the ideal of "Finanzplatz Deutschland" is realized - notably an insider trading law, and an independent securities industry supervisory body. These are hoped for by the end of next year. But for now, the creation of the single German Stock Exchange is being hailed as an important step.

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