European Capital Markets with a Single Currency

ALFRED STEINHERR

Financial derivatives traded on the exchanges are a recent phenomenon. Section 2 provides an overview of the development of this market to establish a starting point for the subsequent analysis. Section 3 then asks a fundamental question: what makes a successful contract? Answering this question is important for the assessment of the future configuration of European financial futures and options markets.

This future configuration is influenced by three already observable forces that are not easily disentangled. The first, analysed in Section 4, is a world-wide consolidation of the activity, driven by the underlying economies of scale benefiting exchange-based trades and by pressure on costs owing to fierce competition among the exchanges and with OTC markets.

The second is the choice of trading technology. For a long time the view was generally accepted that, for contracts with large trading volume, open outcry was the dominant trading organization and screen-trading a useful complement for off-hours trading or trading of less important contracts. With advances in technology, this view has become challenged in the marketplace. Totally different viable market configurations have now become possible and these are discussed in Section 5.

The third force is European Monetary Union (EMU), the ultimate concern of this chapter. As other chapters in this volume argue, EMU is bound to create an integrated capital market in the European Union with a single price for a given financial product (see the discussions in Chapters 1, 2, and 4). The exchanges, generally, will be affected by this integration process. The desirability of maximum liquidity is expected to produce migration of trading activity to those exchanges that already dispose of a liquidity and environmental advantage. This process will also affect the exchanges for financial derivatives, arguably even more strongly. But the integration forces are very likely unequal across market segments. Section 6, therefore, investigates the major market

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