The Effects of Foreign Competition on Stock Markets: SEAQ International vs. Switzerland

Abstract

In the aftermath of financial market deregulation, capital flow liberalization, and information technology innovations during the early 1980s, the European secondary securities markets were facing a serious challenge. Most stock exchanges lost a significant part of their market share in the trading volume of domestic equities to London, where the SEAQ International (for short: SEAQ), a quote-driven screen-based market maker system, was introduced in 1985.^{2 3} Authorities and market participants reacted by changing the design and the regulation of European secondary securities markets as domestic brokers and banks wanted to regain the market share lost to London.⁴ The Swiss stock exchanges have also experienced this competitive pressure. Today, it is a common guess that about fifteen percent of the trading activities in Swiss Blue Chip shares takes place on SEAQ.⁵ In this paper, the impact of the establishment of SEAQ on Swiss stock exchanges is investigated. This system is of particular interest because it is the only trading system outside Switzerland with a significant market share in the secondary markets for Swiss equities. However, it is likely that Swiss stock markets have also been affected by changes in secondary securities markets in other countries because they have influenced the trading activities in foreign securities in Switzerland, which were said to have generated as much brokerage income as those in domestic equities.⁶

The author thanks his discussants at the conference, Peter Aemi and Richard T. Meier, as well as George Sheldon, Alexander K. Swoboda, and Peter Zweifel for helpful comments. The detailed comments of Nikiaus Blattner and Hans Genberg on the revised version of the manuscript helped to improve the exposition substantially and are gratefully appreciated. All remaining errors are mine.