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Europe's Stock Exchanges Tackle Needed Integration

SINCE the new year began, it's been simpler and more cost-effective for NatWest Securities' customers in London to invest in firms listed on the Swedish Stock Exchange.

Under the European Union's new investment services directive (ISD), NatWest brokers are allowed to execute trades in any publicly held company over an electronic screen, not unlike the American over-the-counter trading system, without using a local broker in Stockholm as an intermediary. That means swifter execution of trades, and only one sales commission to be paid, instead of two.

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This kind of modernization of capital markets is being seen as critical if European economies are to modernize as they must, and if they are to create desperately needed jobs.

Investors, especially the all-important institutional investors, want to be able to get in and out of investments easily. They want financial reports that let them make apples-to-apples comparisons. And they want relevant business information about the companies they invest in. ''If they think they're not getting the information they need, they'll go elsewhere,'' says J. Paul Horne, chief international economist at the brokerage house Smith Barney Inc. in Paris.

It has become commonplace to lament the lack of capital in Europe for startup businesses, especially in Germany. ''But the problem is not just start ups,'' Mr. Horne says. The capital issue is ''probably most important for medium and big companies'' that are constrained from expanding.

IN any case, the new year has brought some important changes. The ISD, which lets brokers regulated in one country trade shares directly on the stock exchanges of other member countries, is one of these. Another is a new cooperative agreement among four of the eight German stock exchanges. To be phased in over 1996, the agreement will mean, among other things, common opening and closing prices for individual stocks, rather than one price in Frankfurt, say, and another in Munich.

Meanwhile, on Jan. 4 the London Stock Exchange abruptly dismissed Michael Lawrence as chief executive, showing that the road to modernization can be as bumpy in capital markets as in any other industry. The exchange is considering reforms in how shares of its 350 top stocks are traded.

Mr. Lawrence lost the confidence of the exchange's member firms by favoring an order-driven system, as opposed to the current ''marketmaking'' system in which financial firms bring buyers and sellers together. An order-driven system is widely seen as a necessary modernization for the London exchange. Though it is Europe's largest exchange, London is coming under pressure as Continental markets modernize their systems. For example, the London exchange has traditionally handled a significant share of German equity business - roughly 10 percent last year - in part because institutional investors have had trouble buying or selling large lots on the fragmented German exchanges. As Germany improves its systems, London could be the loser.

Jean-Pierre Paelinck, secretary-general of the Federation of European Stock Exchanges in Brussels, is bullish on the prospects for his member exchanges under the new ISD system. But only seven of the 15 European Union (EU) member states - Belgium, Britain, Denmark, Ireland, Luxembourg, the Netherlands, and Sweden - were ready to participate in the new system on Jan. 2. Others still have legislation to pass. The system is expected to reinforce the position of the most active market for a given security, rather than to spread transactions around the EU.

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Two other developments expected this year:

* The European Association of Securities Dealers' Automated Quotation system. Boosters hope the ''Easdaq'' market will, like America's Nasdaq over-the-counter market, be a focus for young high-tech companies.

* A Franco-German system that would allow traders to deal in both French, German, and some other equities on the same screens.

''Germany has been the furthest behind of all the major markets,'' says Horne of Smith Barney. In 1984, the French ''leapfrogged'' ahead of Germany, introducing a new banking law that has since become the EU standard, he says. The French streamlined their back-office operations and eliminated paper stock certificates.

Horne sees the German capital market as controlled by banks that are ''not interested in developing an alternative capital market.'' Banks and insurance companies control about three-fourths of Germany's capital market, emphasizing long-term loans rather than equity offerings. Germany has also been criticized for using an accounting system that differs from the Anglo-American one that many institutional investors are accustomed to. Some German firms, such as Deutsche Bank, Germany's largest commercial bank, have recently announced that they will report earnings in both formats.

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