Spain’s Old-Fashioned Stock Exchange Will Get an Electronic Face Lift

Spain’s stock exchanges will soon be transformed from a creaking system dating to the Napoleonic era into a modern electronic marketplace.

Luis Carlos Croissier, chairman of the newly created National Securities Commission, says the changes will be more profound than the so-called “Big Bang” that revolutionized London’s financial markets in 1986.

“Our ‘Big Bang,’ if we compare it with its point of departure, will be a much bigger transformation than what the United Kingdom experienced,” he said.

“With the liberalization of international capital markets, a bourse can only survive if it is competitive,” he said. “Bad settlement and low liquidity will make trading migrate to more competitive exchanges.”

Telecommunications utility Telefonica de Espana, Spain’s largest company with listings in London, New York and Tokyo, is sometimes more heavily traded abroad than at home, brokers say.

“London’s Big Bang has been an inspiration, but we have not adopted a similar model,” Croissier said.

Under the reform, Spain’s four open-outcry markets in Madrid, Barcelona, Bilbao and Valencia will be replaced this year by a continuously traded electronic market based on the Computer Automated Trading System (CATS) developed by the Toronto Stock Exchange in Canada.

Spain’s stockbrokers have enjoyed exclusive rights as intermediaries in all share transactions but will lose this monopoly at the end of July, Croissier said.

They will have to choose between grouping together to form brokerage companies, which cannot deal on their own accounts, or dealing companies, which can.

Continuous trading through the CATS system will already be in operation for a number of stocks by the time the stockbrokers lose their monopoly.

“The aim is to have all stocks continuously traded . . . but it took Paris 2 years,” Croissier said. “We are seeking the most transparent market possible where the system of price-fixing is clear and transparent and where forms of conduct are regulated where conflicts of interest arise.”

Insider trading is not illegal in Spain and many local stockbrokers say it is widespread on domestic markets.

The weakness of Spain’s antiquated bourse structure was exposed during the global stock crash of 1987. Many investors could not get out of the market when prices plunged because of a chronic lack of liquidity.

Croissier said the new Spanish market would be different in two key respects from London’s post-Big Bang exchange.

“The London market is based on market makers, while our market will be based on an auction system,” he said.

Dealers will be allowed to take positions in the market, which Spanish brokers are now forbidden to do, but they would not determine prices by constantly making markets in stocks as in Britain, Croissier said.

The other key difference would be that the markets would be regulated by the state-appointed Securities Commission. There will be no self-regulation as in Britain.

The commission is to spend the coming months drawing up rules to determine capital requirements for brokerage and dealing companies and to regulate the disclosure of large share purchases, Croissier said.

He added that he hoped a new clearing and settlement house could be set up by July, to be owned by commercial and savings banks and by the dealing and brokerage companies.