The home page of the Irish Stock Exchange's (ISE) website carries a photo of its grand headquarters in Dublin. But last year the heart of the ISE was relocated to Frankfurt, where the exchange now runs on Xetra, the Deutsche Borse trading system.

The Deutsche Borse also runs the Austrian exchange on an outsourced basis, and if events had gone to plan, the London Stock Exchange would have dropped its Sets trading platform, in favour of Xetra.

The failure of Europe's two largest exchanges, London and Frankfurt, to create the propose iX merged exchange has slowed the consolidation of Europe's equity markets. Politics and different regulatory frameworks still stand in the way.

But the push from technology - providing the ability to cut costs with straight through trading, to trade across borders in real time, and lowering the barriers to entry for new competitors - makes consolidation inevitable.

"The technology revolution we see today impacts our industry as a whole," says Jos Schmitt, a partner at Capital Markets Company, a consultancy that specialises in financial markets. "Just look at what technology has made possible: the internet makes access much easier for everyone - whether professional or retail investor - costs are low, and it has become easier to provide solutions."

As investors become increasingly knowledgeable, their behavious is changing, he says. "They are aware of what the technology allows them to do, they can compare costs, liquidity and quality of information across exchanges."

Europe's traditional stock exchanges are having to accommodate changes in technology and in user base, around legacy systems such as Sets, Xetra, Saxess (Stockholm) and NSC (Paris). No matter how robust, these are non-compatible, proprietary systems that are expensive to run and lack the flexibility offered by open, internet-based technology.

Peter Bobris, a financial markets expert at IBM, says: "Stock exchanges are in a very difficult position. They have huge investment in IT infrastructure. If someone came along today and said give us all this functionality, it would cost a third of the sorts of sums exchanges have invested in legacy systems."

More diversity

New technology is not just a route to cut costs and preserve existing markets. David Slight, business development manager for Microsoft in the City of London, says adopting the open standards of the internet would allow exchanges to diversify into value added services, such as hosting, application service provision and analytical services. "And not only could they offer services out, they could buy them in. You don't have to source anything internally," he says.

The problems raised by legacy systems are compounded because business is booming. Both the LSE and Deutsche Borse reported record volumes last year. Similarly, trading on the Amsterdam exchange was up by 66 per cent.

A cause for celebration perhaps, but Mr Schmitt says: "Skyrocketing volumes of share dealing are causing processing bottlenecks, and adding capacity to legacy systems is very expensive."

Meanwhile, new competitors with faster, slicker and cheaper systems are taking advantage. Jiway, a 60:40 joint venture between OM Group, which runs the Stockholm Exchange, and the US investment bank Morgan Stanley Dean Witter, launched a pan-European exchange for retail investors (in general poorly served by traditional exchanges) in November 2000.

Jiway says it will provide a single access point to more than 6,000 US and European shares, combined with front and back end processing. Easdaq, the pan-European technology market modelled on Nasdaq, avoided the legacy problem by outsourcing all IT systems when it launched in 1996.

"Easdaq and Jiway are not only in the trading space and the settlement space, they offer the entire transaction in a one-stop-shop, using cheap technology to reduce costs," says Mr Schmitt.

Away from the iX debacle there was some progress in consolidation, with the formation of Euronext, the alliance of the Paris, Brussels and Amsterdam exchanges. Although officially launched in September 2000, the three partners (with Lisbon also pledged to join) remain in the thick of the grunt work of merging systems.

Details of the Prominext project (Project Migration Netherlands Euronext), on the Amsterdam Exchange's website, give a flavour of the complexity involved in creating a single IT environment for Euronext.

Compromise

A decision to merge around existing systems is a compromise, according to Mr Schmitt. "They will need to work on capacity issues, and will continue to struggle with some poor characteristics of the systems they have."

In common with Deutsche Borse, Euronext is now planning an IPO to raise money for new technology. A second European alliance, Norex, which includes Sweden, Denmark, Iceland and Norway, also gathered momentum last year. Norex is based on the OM trading platform Saxess, run by the OM Group. There are plans to merge the respective clearing and settlement systems.

OM Group cited its ability to lower costs by replacing Sets with Saxess when it tried to take over LSE last year. Similarly, it was planned that Sets would be dropped in favour of Xetra in the iX merger.

Having escaped from two suitors, the LSE is upgrading Sets, installing new processors and migrating from its proprietary X25 network to an IP network. The appointment last month of Clara Furse as chief executive of the LSE sparked talk of an IPO and a new push to join forces with other exchanges. In the meantime the LSE will rely on brand, a reputation for running a fair market, and most significantly, liquidity, to protect its position.

One traditional exchange that believes it is poised to capitalise on the flexibility that non-proprietary trading platforms can provide is the Swiss Exchange, which is updating its Unix-based system to Microsoft Windows 2000.

It claims the new architecture will enable connection to another exchange to be set up within a few months. "This will strengthen our competitive position by simplifying global interlinking of financial locations," according to Jurg Spillman, chief information officer.

The first demonstration will come with the launch, due at the end of the second quarter of this year, of Virt-x, a joint venture with Tradepoint, a London-based electronic market. Virt-x, to be based in London and subject to UK regulation, will run on an outsourced basis on the Swiss trading platform. It will create a single market for blue chip European stocks, representing 80 per cent of European trading by value.

Whatever the difficulties of consolidating exchanges, it will happen, says Mr Bobris. "In the end, there will be one single global system, like Visa card. This will require a huge investment in IT. But even though there is already such a huge capital investment sitting in place, there is a global economic pressure to do it."