Deregulation
Deregulation
The major event in international equity markets in recent years was the "big bang," the deregulation of the British stock market which occurred in London on October 27, 1986. Prior to that time, the City of London (the financial district in London) operated on two different sides. The first side was the domestic front, home to the U.K. financial firms that controlled the U.K.'s financial system. Custom and regulation basically kept the domestic side from keeping up with financial services developed elsewhere.
The other side was the Eurocurrency market, which was dominated by foreign institutions. The British government's abolition of exchange controls in 1979 blurred the differences between the domestic and international sides of the City of London. However, the big bang resulted in a dismantling of the trading system, a liberalization of Stock-Exchange membership requirements, and an opening of the market to foreign competition.14 These changes have resulted in a significant liberalization of one of the largest capital markets in the world.
One side effect of deregulation has been the modernization of stock exchanges around the world. New technologies are being employed by nearly every major exchange worldwide, and the exchanges are beginning to link together in various ways, such as in listing and trading securities in each other's markets. Both the Stockholm and Amsterdam stock exchanges have announced formal links with U.S. exchanges, primarily in the Midwest. There are similar links between Amsterdam and Tokyo and between London and the United States. These are just a few examples of dozens of linkages that exist and are being planned worldwide.15
The stock-market crash of October 1987 resulted in the nearly simultaneous collapse of stock prices around the world, illustrating how global the stock markets had become. Since the markets are not open at the same time around the world, global events occur sequentially as markets open and react to information. In a study of the globalization of securities, it was found that market events are more important than individual industry events in affecting stock prices. The authors also predicted that global investors armed with the same information would minimize the dominance of any particular national stock market over international markets.'5
It is interesting to note that most stock markets fell in 1990, with the exception of Hong Kong, which rose 4.7 percent over the previous year. How-
ever, the Bank of Japan and the Ministry of Finance engineered a fall in the Japanese stock market that resulted in a drop of 40 percent in 1990. Their feeling was that stock prices had climbed too high and that too much growth was built on high stock prices and high land prices. The U.S. stock market was down only 5.3 percent in 1990. For much of the 1980s, the Nikkei index in Japan was roughly 10 times the Dow Jones Industrial Average (DJIA), but that relationship had grown to 14 to 1 by the end of 1989. At the end of 1990, the Nikkei was trading at around 24,000, whereas the DJIA was trading at around 2600, illustrating how much the Nikkei had really fallen in a relative sense in 1990.
The major event in international equity markets in recent years was the "big bang," the deregulation of the British stock market which occurred in London on October 27, 1986. Prior to that time, the City of London (the financial district in London) operated on two different sides. The first side was the domestic front, home to the U.K. financial firms that controlled the U.K.'s financial system. Custom and regulation basically kept the domestic side from keeping up with financial services developed elsewhere.
The other side was the Eurocurrency market, which was dominated by foreign institutions. The British government's abolition of exchange controls in 1979 blurred the differences between the domestic and international sides of the City of London. However, the big bang resulted in a dismantling of the trading system, a liberalization of Stock-Exchange membership requirements, and an opening of the market to foreign competition.14 These changes have resulted in a significant liberalization of one of the largest capital markets in the world.
One side effect of deregulation has been the modernization of stock exchanges around the world. New technologies are being employed by nearly every major exchange worldwide, and the exchanges are beginning to link together in various ways, such as in listing and trading securities in each other's markets. Both the Stockholm and Amsterdam stock exchanges have announced formal links with U.S. exchanges, primarily in the Midwest. There are similar links between Amsterdam and Tokyo and between London and the United States. These are just a few examples of dozens of linkages that exist and are being planned worldwide.15
The stock-market crash of October 1987 resulted in the nearly simultaneous collapse of stock prices around the world, illustrating how global the stock markets had become. Since the markets are not open at the same time around the world, global events occur sequentially as markets open and react to information. In a study of the globalization of securities, it was found that market events are more important than individual industry events in affecting stock prices. The authors also predicted that global investors armed with the same information would minimize the dominance of any particular national stock market over international markets.'5
It is interesting to note that most stock markets fell in 1990, with the exception of Hong Kong, which rose 4.7 percent over the previous year. How-
ever, the Bank of Japan and the Ministry of Finance engineered a fall in the Japanese stock market that resulted in a drop of 40 percent in 1990. Their feeling was that stock prices had climbed too high and that too much growth was built on high stock prices and high land prices. The U.S. stock market was down only 5.3 percent in 1990. For much of the 1980s, the Nikkei index in Japan was roughly 10 times the Dow Jones Industrial Average (DJIA), but that relationship had grown to 14 to 1 by the end of 1989. At the end of 1990, the Nikkei was trading at around 24,000, whereas the DJIA was trading at around 2600, illustrating how much the Nikkei had really fallen in a relative sense in 1990.
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