In the clearest sign yet that national boundaries are disappearing within European financial markets, the stock exchanges of London and Frankfurt announced a broad alliance today aimed at creating a pan-European trading system.
The alliance between Europe's two biggest stock exchanges comes as financial institutions across the Continent are preparing for the debut of the euro as a new European currency in January.
It also highlights the growing pressure on London, which wants to preserve its role as Europe's financial center even though Britain will remain outside the new currency union for the time being.
Today's move came just two weeks after Frankfurt's exchange, the Deutsche Borse, disclosed that it was discussing potential joint ventures with Nasdaq, the electronic over-the-counter trading system in the United States. Executives are now looking at the possibility of three-way discussions that would include Nasdaq.
To be sure, European stock exchanges have talked about alliances many times before, without much to show for their efforts. The Frankfurt, Zurich and Paris exchanges announced plans for an alliance last fall, but they have yet to make much practical progress. French and Swiss officials apparently knew nothing about the talks between London and Frankfurt.
Under the agreement announced today, the London Stock Exchange and the Deutsche Borse plan to develop a joint electronic trading system for blue-chip British and German stocks. But the ultimate goal is to bring in other European stock exchanges and create a unified electronic market for major stocks across the Continent.
The move is ''the first step along the road to a single European market,'' said Jack Kemp-Welch, chairman of the London Stock Exchange, at a news conference in London.
Though European stock prices have soared in the last year, the markets remain fragmented and inefficient. Each country has at least one exchange, and few companies are traded in more than one market. Trading volumes tend to be lower, because activity is scattered among multiple exchanges that run on different rules, different languages and different technologies.
Now, with 11 countries adopting the euro as a common currency on Jan. 1, European financial institutions are rushing toward consolidation. Under the rules of the European Monetary Union, securities traded in the euro zone will be listed in euros rather than national currencies on the first day of business next year.
''At the end of the day, euro-land will have one or at best two major financial centers,'' Frank Beelitz, managing director of Lehman Brothers' office in Frankfurt, said.
Until today, London's security exchanges have given every impression of trying to compete on their own rather than team up with other European exchanges. Though Britain is not adopting the euro for the moment, London-based financial institutions have prepared for euro-based trading and hope to benefit from a general trend toward consolidation.
The London and Frankfurt stock exchanges have until now viewed each other as blood rivals, with each hoping to assume the leading role in a unified European marketplace. At the moment, the London Stock Exchange lists almost three times the number of companies listed in Frankfurt. But the Frankfurt exchange generates more trading volume, because it is home to the heavily traded stocks of corporate giants like Daimler-Benz and Siemens.
The Deutsche Borse has made several big advances in the last year or so. Its relatively young futures market has overtaken the London futures exchange in several key areas. It has also had great success with a new electronic trading system, called XTRA, which now accounts for about two-thirds of the exchange's total trading. That stands in contrast to the London Stock Exchange's new electronic trading system, called SETS, which functions reasonably well but has yet to generate heavy trading volumes from institutional traders.
In announcing their alliance today, the two exchanges said they planned to create a company that would eventually establish a single electronic trading system for major stocks across Europe. The first step, which exchange executives say will take about 12 months, is to harmonize rules and create common procedures for buying stocks.
''The goal of the alliance is to deliver a low-cost, efficient and accessible equity market infrastructure,'' Werner Seifert, chief executive of the German stock exchange, said. Though technical details have yet to be decided -- and could turn into big obstacles -- Mr. Seifert said the goal was to create the ''nucleus of a single European stock market which will ultimately be based on a common electronic trading platform.''
Photo: With many details of cross-border cooperation still not known, traders at the Frankfurt exchange yesterday kept doing business while no doubt wondering what changes would come with the new ties to Britain. (Reuters)