EASDAQ: Fighting for a Lost Cause?

Five years after its formation, Easdaq still hasn't given up the fight to become the pan-European market for growth stocks--but it hasn't won the war either. Despite its aim of providing growth companies with European-wide exposure, using a single regulatory environment and trading system--the Brussels-based exchange has so far failed to become the Nasdaq of Europe.

Five years after its formation, Easdaq still hasn't given up the fight to become the pan-European market for growth stocks—but it hasn't won the war, either. Despite its laudable aim—to provide growth companies with European-wide exposure, using a single regulatory environment and trading system—the Brussels-based exchange has so far failed to become the Nasdaq of Europe.

Trading volumes remain low. There are just 60 listed companies, and biotechs—with the exception of a handful including Antisoma PLC , Innogenetics NV , Pharming Group NV , and Orthovita Inc.—have shunned Easdaq in favor of local exchanges. For those that did list, it was usually because they couldn't satisfy criteria for local markets, many of which at the time were unreceptive to growth firms. After floating on Easdaq in 1998, Pharming saw its liquidity triple the minute it listed on its local Amsterdam Stock Exchange. "We are disappointed with Easdaq's performance," says CFO Ino Cooijimans.

Easdaq's most recent effort to reverse its fortunes comes in the form of a new fully-automated trading platform, to be introduced in March. It's already seen that technology alone won't attract crowds—last April's new settlement system didn't do much. Nor do promises to offer Europe-wide road shows; exposure to key investor communities across Europe appears to be enough.

More successful was a strategy introduced in January 2000 offering a free dual-listing facility to certain heavily-traded companies listed elsewhere (such as MorphoSys AG and Qiagen NV ), many of which otherwise would not have considered Easdaq. Bruce Peacock is CEO of Orthovita, which, in 1998, was one of the first companies to list on Easdaq, which Peacock chose because it has similar reporting requirements to the US but lower entry hurdles than Nasdaq. Peacock claims the company's trading volume picked up when dual-listing was introduced, but acknowledges volumes are still low.

Easdaq is holding on to the lofty ideal of a pan-European exchange largely because no one else has managed to fulfill it. Marcus Wohlrab, Easdaq's executive VP, market development, who joined recently after three years at Nasdaq, acknowledges that this would not likely be the case if iX, the planned link-up between Frankfurt and London's stock exchanges, had succeeded. "IX would have had serious repercussions for us, and others," he says. IX didn't happen because London and Frankfurt couldn't agree on who would adopt whose trading platforms and settlement systems, and a suggestion to list blue chips in London and growth companies in Frankfurt was anathema to most.

Although Easdaq plays such power struggles between local exchanges to its advantage, a local base looks increasingly necessary to provide the momentum an exchange needs. And for that reason, a truly pan-European market, at least for the foreseeable future, is an unrealistic dream. "The problem with Easdaq is that it doesn't have a local investor base to give it critical mass," says Karl Keegan, analyst at UBS Warburg in London. Others say Easdaq does have a local base—51% of quoted companies are Belgian—but that this undermines its European-ness. Sam Williams, ABN Amro analyst, believes, "Easdaq won't take off until local markets disappear."

Indeed, maintaining local bases was just what the Euro NM project—an informal alliance between growth markets in Germany, France, the Netherlands, Belgium and Italy—set out to do, around the same time Easdaq was formed. But this avenue proved a dead end, too, when one player, Germany's Neuer Markt, grew much faster than the other markets and decided to go it alone.

But, like Easdaq, the other Euro NM members aren't giving up. The Amsterdam, Brussels and Paris exchanges last Spring announced they would unite under a single holding company, Euronext NV. By the end of this year, all companies quoted on any one of exchanges will be automatically listed on Euronext and traded across all three countries, using an integrated clearing and settlement system. Integration of systems—which proved iX's downfall—is something Euronext's Bruno Rossignol claims is nearly complete, made easier by the fact that all the exchanges had similar structures to begin with.

Listing rules and company jurisdiction will remain local, although efforts are underway to harmonize these. Local indices will also continue to exist alongside the Euronext Top Stocks (listing all the biggest stocks, regardless of sector), Next Economy, for high growth stocks, including biotechnology and medical devices, and M-Prime for old economy stocks.

Euronext has a narrower ambition than Easdaq. It isn't vying to become a single market for the whole of Europe. Rossignol doesn't even think such a thing will emerge—at least, not until there are Europe-wide company rules and a European SEC. He expects to see different trading blocs emerge, as is happening already with Scandinavia's Norex and last year's merger between the Swiss Exchange and London's Tradepoint to create Virt-x, a pan-European market for blue chip companies.

Any pan-European exchange—like most things pan-European—will be a long time coming. And there's no guarantee that Easdaq, just because it was first off the blocks, will win the prize. "It's way too early to judge Easdaq," says Orthovita's Peacock. And he feels Easdaq, with its integrated technology and facility for trading in Euros, is well positioned to take on the role of pan-European exchange when the time comes.

But in the interim there will likely be other players. Warburg's Keegan suggests the Neuer Markt may take on the role of European growth exchange for biotechs, although he acknowledges it still needs to build critical mass through satisfying local investor needs—precisely what Easdaq was not able to do. Hence the Neuer Markt is still predominantly for German companies (exceptions include Qiagen and Rhein Biotech NV , which is listed in the Netherlands for tax reasons).

Switzerland's New Market has also been successful, in particular for biotechs, given an informed investor base and plenty of pharmaceutical companies. Jacques Essinger, CEO of Modex Therapeutics SA , the first biotech on the exchange, thinks that European integration will be sectoral—companies will gravitate towards the market offering the largest base in that sector. "The Neuer Markt might become the biotech exchange, while London's Techmark houses IT," he surmises. Sectoral breakdown didn't suit potential iX members, although such barriers may be lower for smaller, less well-established growth companies.

A key player in determining Easdaq's fate—and the outcome of European markets battle—is likely to be Nasdaq—the very exchange on which Easdaq modeled itself. Nasdaq's latest European plan foundered with iX; it aimed for a joint Nasdaq Europe-iX venture, folding Nasdaq stocks in with London's Techmark and the Neuer Markt. Since then, Nasdaq has focused its energies on Nasdaq-Japan, another step towards its long-term goal of creating a global exchange with 24 hour trading.

But plans for Europe are still very much alive, according to Nasdaq's Andrew McMillan. "We are talking to everybody," he says. That no doubt includes Easdaq, which would, arguably, benefit most from being associated with Nasdaq. Nasdaq's brand would bring credibility, and its size would bring Easdaq the volume it is equipping itself to deal with. (The new trading system will allow 3 million trades per day, seven times those on Nasdaq.) But while a tie-up with Easdaq, which uses the same market-making system and language as the US, would avoid the power struggles which doomed iX, it wouldn't give Nasdaq a piece of Europe's biggest markets, London and Frankfurt. "We need to be where the order flow is," says McMillan.