Europe's two largest exchanges announce they will merge to form a giant pan-European bourse

By THOMAS K. GROSE

he Chinese military sage Sun Tzu taught that when making war, surprise is often the best strategy. Last week, Europe's two largest stock markets, the London Stock Exchange and Frankfurt's Deutsche Borse, proved that surprise can also be a cunning maneuver when making peace. Gavin Casey and Werner Seifert, the heads of the former adversaries, astonished European equities strategists by ending a long-running rivalry for dominance of Europe's financial markets. They will form a strategic alliance that could lead to a pan-European stock market, second in size only to the mighty New York Stock Exchange. Initially their members will be limited to trading in shares of around 300 European blue-chip companies, but the goal is a common electronic trading platform.

It is no coincidence that the Anglo-German venture will begin in earnest on Jan. 4, 1999, the first trading day after the launch of the single European currency. In theory, the euro should make it easier for Europeans to invest across borders, but the current plethora of national markets makes Continental investing cumbersome and costly. And Europe's big commercial banks are demanding a single market. "The bankers are saying, 'Why are we messing around with 17 different stock exchanges when we really only want one?'" explains Stephen Wells of the London School of Economics Financial Markets Group.

Britain has opted out of the single currency for now, and London could see itself losing euro-based trading to Frankfurt, headquarters of the European Central Bank and in the heart of the eurozone. London-based brokers worry that they could lose their dominance in Europe. By joining forces instead of slugging it out, London and Frankfurt can also ensure their fiefdoms remain intact. They plan to retain their separate identities and continue to list smaller companies. America's NASDAQ exchange has been looking to link up with Deutsche Borse, too. NASDAQ's John Wall said that his organization would be keen to align itself with a pan-European market.

The Anglo-German rapprochement was less well received in Paris. Michel Freyche, president of the French Bankers' Association, said the alliance was a "bad blow for the euro." He added: "The choice of Frankfurt as the seat of the E.C.B. confers an undeniable competitive advantage on this financial center, but equally imposes a number of duties and obligations to respect the rules." The French recall that plans for a European common trading platform disintegrated several years ago because of British and German resistance. But London and Frankfurt say they would now welcome other European bourses.

Much remains to be done. The two exchanges have differing listing rules, and clearing and settlement schemes. Still, the logic is irrefutable. Says Michael Marks, a London exchange board member and executive chairman of Merrill Lynch for Europe, the Middle East and Africa, "A pan-European, liquid market is inevitable, and this is the best first step we could possibly have."