Merrill Lynch & Co. is poised to take advantage of an expected surge in European stock trading.
The investment banking and brokerage giant has spent tens of millions of dollars since 1996 building a new transaction and settlement system to support its European equities business, expected to mushroom after Jan. 4.
That is when the new common currency, the euro, begins the first phase of its three-year introduction as legal tender for 11 European countries, as decreed by the Maastricht treaty of 1992.
It is "a key date where volumes and liquidity will increase," said Jean- Marc Bouhelier, first vice president and head of global equity technology at Merrill Lynch.
It also marks the beginning of "the greatest single opportunity that anyone is going to see for years," said Paul Cantwell, a London-based partner with Andersen Consulting who worked with Merrill Lynch on the systems preparation.
The euro countries must hold their debt rates below 3% of gross domestic product, under the treaty guidelines. As a result, state-run pension systems in Europe are rapidly becoming privatized.
"When they do that, they start holding equities, and then you build up a demand for equities," Mr. Cantwell said.
Historically, European companies have issued equity as a last resort, preferring to borrow from banks, Mr. Cantwell explained.
The result of these changes "will create a market that is in many senses as big, if not bigger, than the U.S," Mr. Cantwell said.
Mr. Bouhelier said the privatization trend has already helped boost Merrill Lynch's European-based equities business. Five years ago, Merrill had fewer than 30 traders in Europe; now it has more than 500.
"A lot of the increase happened in 1998 as fund managers started to rebalance their portfolios," he said.
The Merrill effort, dubbed the London Equity Renewal project, is 60% complete. A first step was to jettison legacy systems that were designed to operate within individual countries.
Working with Andersen Consulting, and using software from Automatic Data Systems Inc., Merrill developed a pan-European trading system based on industry sectors, not geography. It has not revealed the cost.
Mr. Bouhelier said Merrill is among the first to have a sector-based trading system, but added, "We are hearing that a lot of our competitors are trying to do the same thing."
Merrill Lynch's system dovetails with a consolidation trend among European stock exchanges and securities clearing houses.
Exchanges in Germany have agreed to develop a common platform to trade their 300 largest stocks, Mr. Bouhelier said. The Italian, Spanish, and French stock exchanges have expressed an interest in joining it.
"It is in our interest that liquidity be increased and it is in our interest that the number of exchanges we have to deal with goes down," Mr. Bouhelier said.