LONDON — The London Stock Exchange joined its biggest rival, Frankfurt's Deutsche Boerse, in a surprise alliance Tuesday, laying what both sides hope is the foundation for a single European stock market.
Negotiated in secrecy over the last two months, the strategic pact unites the Continent's two largest exchanges in a project to make it cheaper and easier to trade major European stocks.
It will coincide with the introduction in 1999 of the euro single currency, which is expected to force consolidation throughout Europe's plethora of financial markets and eliminate currency risk for investors buying stocks in other Euro zone countries.
"Through this plan, starting with combining the trading of leading German and U.K. stocks, we aim to create the nucleus of a single European stock market which will ultimately be based on a common electronic trading platform," the two exchanges said in a statement released at a news conference at London's Savoy Hotel.
The first fruit of the alliance will be a common package next year to deal in leading German and British shares. If successful, the alliance could lead to a joint system trading 300 top stocks from across the Continent.
The two exchanges, which together trade shares worth more than $3 trillion, say they will invite other exchanges to join. Only the New York Stock Exchange, whose listed companies have a combined capitalization of $13 trillion, would be larger.
German bankers said they thought the common electronic trading system would probably be based on Frankfurt's existing Xetra technology, although no official decision has yet been reached.
The announcement marks a change in the rivalry between London and Frankfurt and comes as stock and derivative exchanges around the world combine to cut costs and offer more trading to customers. This year, the Nasdaq Stock Market and the American Stock Exchange will merge to create the second-largest U.S. stock market.
The joint-venture agreement left other exchanges in Europe stunned and wondering how it will affect their own negotiations with the two. The Paris Bourse earlier agreed to develop a common trading system with the German market, and the Swiss Exchange is adopting a system for trading futures and options with the Germans, called Eurex.
European exchanges are combining in part because of the creation of the euro, the common currency that 11 European Union members will adopt Jan. 1. They expect the euro to foster a single equity market in much the same way as it's leading to a single market in bonds and currencies.
London, once the unquestioned center of financial market trading in the European time zone, has seen its lead sharply eroded by growing competition from Frankfurt.
Frankfurt is home to the new European Central Bank, which will manage the euro. London is the capital of a country that has opted to stay out of the single currency for the time being.