GEMs giving value a bad name

We shall have to be careful about using the acronym GEM in the future to describe markets. It could rapidly become a synonym for bad luck.

We used it first for the new trivial pursuits board of the stock exchange, the Growth Enterprise Market, and that one has already sunk like a stone since being established.

Now we are likely to use it again for the Global Equity Market, an international scheme proposed this week to link 10 stock exchanges, including Hong Kong's. This one also looks like an immediate loser.

Ask yourself an obvious question. With the rapid spread of the Internet and cheap modern communications technologies why should securities be traded on the floor of a stock exchange? They can be listed in cyberspace where anyone in the world can see the bids and offers and, if some people do not want to do it directly on screen, a trader who will make them a price anywhere in the world at any hour of the day or night is as far away as the nearest telephone.

Stock exchange floors represent 19th Century technology and we have them because that is when securities trading really began to take off. Vested interests do not want to change and this is the principle reason that methods of trading lag the available technology.

But they have been challenged by the cyberspace alternative, most notably in recent years by the Nasdaq market in the United States, and electronic trading is now growing fast.

It does not please the old style New York Stock Exchange, which has been in retreat as a result. The Global Equity Market is its response to the linkages Nasdaq is now making with the London and Frankfurt markets to create a global exchange up there in the radio spectrum and along telecommunications cables.

This now has commentators talking about a future in which there are really only two stock exchanges in the world, the Nasdaq alliance and the GEM alliance. But it is a misunderstanding.

What we actually have on one side is a natural evolution of securities trading represented loosely by Nasdaq at the moment and on the other the last-ditch defence of the old floors.

If this new GEM turns out to be an attempt to create 10 superfloors it is doomed. You won't find US stocks traded actively by Hong Kong floor clerks down there in Exchange Square even if the 10 come to common standards and it is by no means certain that they can.

And if the new GEM goes into cyberspace there will be no real difference from the directions that Nasdaq is leading us and that big institutional investors and stockbrokers have already adopted for the largest chunk of their dealings.

It is not a question of who will win between the alternatives.

One of these two will become the other or it will vanish and the date of its disappearance will be determined only by how forcefully securities regulators in any country insist on keeping old practices with which they are comfortable.

The question is rather what these securities regulators can do to maintain their supervisory role as the business changes.

Cyberspace does not lend itself to the territorial legal jurisdictions on which regulation now depends.

Do your deals on your screen, book them offshore, and you leave the regulators scrambling for laws and enforcement techniques to find you.

This is, of course, with the exception of regulators in the US. Find an American judge who concedes that he does not have jurisdiction in an international dispute and you will have a species so rare that any zoo will clamour for him.

Get ready for it. The letter 'F' in SFC for our Securities and Futures Commission will have an amendment made to it at some point.

An extra little horizontal bar will be added to the bottom of that letter to make it SEC, the Securities Exchange Commission of the US.

That is where this new GEM will lead us if the alliance works at all.