| The biggest
single event of this type took place when US fiscal foolishness in the
Sixties gave birth to the Euromarkets almost overnight, and Luxembourg
, which had been quietly minding its own business for hundreds of years
as a Central European backwater, suddenly found itself the jurisdiction
of choice for the listing of Eurobonds, more by being situated in the middle
of a ring of high-tax countries than on account of any particular advantage
it possessed in terms of financial sophistication. Truly it can be said
of Luxembourg that 'Some countries have greatness thrust upon them'. Despite
the enormous value of the bonds listed in Luxembourg, trading in them takes
place elsewhere (in London, predominantly), illustrating the fact that
the key to trading is liquidity. The thousands of mutual funds listed in
Luxembourg are scarcely traded at all, although the arrival of the 'exchange
traded fund' in Europe may begin to change that. |
Luxembourg,
centre of the Euromarkets
|
Given that
there is no liquidity to speak of offshore (Hong Kong and Switzerland being
exceptions), it might be thought surprising that stock exchanges would
spring up in such unlikely places as Mauritius or the Bahamas. But listing
in one thing, trading another. Half of the stocks on the Hong Kong exchange
are registered in Bermuda, while being listed and traded in Hong Kong.
Funds, which don't need to be traded, need stock exchanges to list on,
and are more interested in achieving that regulatory respectability than
in liquidity - so they list offshore. Most stock exchanges require that
a company lists before it can be traded: it's therefore logical that listing
would be close to liquidity in the case of companies (who want their stocks
to be traded) but not in the case of funds. And that's what we find: that
the great majority of offshore listings are for funds, while only very
few companies of any size have offshore listings. When it does happen,
it's usually because they have alternative methods of tapping liquidity.
A good example of this is insurance companies in Bermuda: they go there
for tax reasons, but don't need to raise money because they are the original
capital-raising devices of all time in themselves.
Enter The
Internet
If it were
not for the Internet, the pattern of offshore listing we have described
(many funds and lightly-traded instruments such as SPVs, but few large
companies) would probably continue for a long time, since there would be
no development of liquidity away from the existing 'legacy' bourses and
hence no possibility for major capital-hungry companies to give in to the
temptations of offshore.
The Internet
changes the game, as it is changing all aspects of business, in various
ways. First, it has spawned a vast and very rapidly-evolving group of 'ecn's
which are supported by just the same mega-institutions that provide much
of the liquidity currently available in the legacy bourses. Maybe once
upon a time it was true that stock-brokers in their silk hats or bowlers
provided liquidity to stock markets, but that day is long past. In London
it went out with Big Bang, when the US bulge-bracket banks bought out the
old City partnerships in short order; and similar changes have taken place
elsewhere.
| Nowadays,
Merrill Lynch and Goldman Sachs and their peers provide the bulk of LSE
liquidity. What will happen then, when the ecn's in which they are shareholders
(and to which they can transfer their legacy trading at the drop of a silk
hat) finally amalgamate to provide European and then global trading in
a frictionless electronic market-place with integrated back offices (straight
through trading)? It will be at a price that no legacy exchange can hope
to match.
The answer
is obvious, and only those legacy exchanges will survive which manage to
be bought out by an ecn, or turn themselves into one. The LSE has just
hammered the lid of its coffin almost shut by spurning OM; it will be only
the first of many exchanges to make such an error, compounded in spades
by the stunning short-sightedness of the UK Government in not abolishing
stamp duty on share-trading. |
|
Masters
of the Universe, Merrill Lych and Goldman Sachs
|
The second
major effect of the Internet is to make back offices and, indeed, for that
matter, front offices highly portable. Don't be deceived by the temporary
setback the ecn's are experiencing as consumers adjust to electronic trading
and legacy financial institutions use their fat to compete with starving
and under-capitalised newcomers. This is a passing fad, and in time the
cheapness of e-trading will blow away all other business models. Once that
has happened, and large companies see the great majority of their trading
(and capital-raising) done on the 'Net, do you suppose they will continue
to list in New York, London or Zurich, with all the attendant costs and
regulatory hassles. Why would they? They will list in the cheapest, reasonably
well-regulated place where there is a professional support mechanism that
guarantees probity and transparency and is consistent with access to liquidity.
Enter The
OECD
| From
that point of the argument onwards, things become hazier, because it is
unknowable, for instance, whether an ecn might develop a cyber-regulatory
structure which would permit virtual listing, doing away with all territory-based
stock exchanges. National jealousies will probably prevent that happening
in the short or medium term, because it requires international agreement
to accept the validity of non-national law, and however much progress has
been made in developing over-arching trade law through the WTO, complete
globalisation of law is still a very long way in the future. Ask Pascal
Lamy and Larry Summers about it.
But here are
the offshore stock exchanges already in place to welcome new customers.
They are cheap, they are warm and sunny, they don't pay tax, they have
acceptable regulatory structures, and, Lo! and Behold! here comes the OECD
to make them even more acceptable to the world's tax policemen. After the
major cleaning-up exercises of 2000 and 2001, there will be a set of offshore
jurisdictions whose regimes are as good as or better than the antiquated,
inbred and above all expensive regimes we find in the high-tax countries.
It is wonderfully ironic that the OECD, in an attempt to head off competition
from offshore, is in fact forcing the jurisdictions to position themselves
to capture all the rich countries' business when the time comes. |
 
Larry Summers
and Pascal Lamy:
helping
globalization?
|
Perhaps this
is a little extreme; but you can see the possibilities. Countries such
as Bermuda, Ireland, Jersey, Cyprus (maybe), Hong Kong (already) and Mauritius
are cleaning themselves up for what could be a glittering future. At present,
it has to be said, the offshore stock exchanges don't see the future any
more clearly than their onshore ancestors, the only exception perhaps being
Bermuda, which is steaming ahead with a series of alliances with ecn's.
Bermuda is also one of the better-regulated jurisdictions; but it has some
disadvantages such as a somewhat introverted view of itself and wrong labour
policies which will stunt the development of adequate reservoirs of precious
IT and technological skill-sets. Hong Kong would be the rational choice
among existing low-tax stock markets on which to build a hybrid ecn/legacy
trading market; but there are many difficulties, including its inscrutable
owners in Beijing, its own rather backward level of technology, and, again,
skill shortages. Anyway, it's much too soon to predict which exchanges
will come out on top. The next section reviews twelve offshore jurisdictions
which have stock exchanges.
The Jurisdictions
With Stock Exchanges
|
