Crashing Clones

In the beginning there was only Nasdaq, the American mother of all high-flying tech markets. As the New York exchange took off, others would try to follow. Starting in 1996 with Easdaq in Belgium and Kosdaq in South Korea, a mania for cloning Nasdaq spread from Frankfurt to Tokyo and beyond. Whether indulged by the famously savvy (Singapore) or the merely wishful (Romania), the hope everywhere was to ignite an American-style boom by creating a market that allows small, unprofitable and unproved companies to sell stock directly to the public. Now some of these exchanges are as shaky as the dot-coms they were peddling. Since Nasdaq began to collapse in March 2000, many of its copycats have fallen into scandal, depression and disrepute on a scale that makes the New York original look calm by comparison. On its Web site, Romania Invest offers this blunt warning on the stillborn local market, Rasdaq: "We advise against investing."

The shakeout is coming. At a time when investors are looking for one global market on which they can trade any stock anywhere, the more than two dozen Nasdaq clones have divided the world into a bewildering maze of exchanges. Europe has almost as many exchanges as countries, and these superfree but provincial stock markets have become an obstacle to globalization by jealously hoarding local business. This week Nasdaq will try to bring some global unity to the chaos it inspired by opening a new Nasdaq Europe in Brussels. With this, in addition to its original exchange in New York and branches opened recently in Tokyo and Hong Kong, Nasdaq hopes to become the first true one-stop global market, but it will triumph only over the dead bodies of the competition.

Exchanges in Europe and Asia are fighting aggressively to defend their turf. One of two Japanese high-tech markets recently renamed itself Jasdaq in a bid to turn Nasdaq's own brand power against the American invasion. The venerable London exchange has already launched a high-tech board, hoping to stem an exodus of companies and customers to Nasdaq. "They'll be slugging it out in Europe," says John Davies, managing director at 3i, Europe's largest venture-capital firm. "We don't need three or four exchanges here. Only one will survive."

Copying Nasdaq looked like a killer idea in the 1990s, when Europe and Asia were falling behind the United States in high technology. Governments eyed America's deep and fluid stock market as the key to nurturing and funding innovative companies. The call to create an American-style "equity culture" was particularly urgent in Asia, where the 1997 financial meltdown exposed just how dangerous Asian companies' traditional reliance on bank debt could be. While Asian multinationals were crumbling under the weight of bank debt, American giants like Cisco and Microsoft were rolling, funded by investors pouring billions into their Nasdaq stock listings. So Asians started building high-tech markets of their own, hoping the money would follow.

It wasn't that simple. South Korea's Kosdaq was comatose at birth, in 1996, and took off only after the new government of President Kim Dae Jung loosened entrance rules two years later. Shut out by the banks, which favor Korea's big multinational conglomerates, entrepreneurs like Lee Jai Woong greeted Kosdaq as money from heaven. Lee took his company Daum public on Kosdaq in December 1999, raising $10 million, and it has since become Korea's leading Internet portal, worth $420 million. "If it hadn't been for Kosdaq, we wouldn't have grown this fast," says CFO Lim Bang Hee. With 610 listings, Kosdaq entered last week as the second busiest high-tech market in the world after Nasdaq, with daily volume of $1.5 billion.

Yet even this star clone is in trouble. Kosdaq rose faster than any other growth market in 1999, when its benchmark index jumped 235 percent, only to take the steepest plunge in 2000, falling 87 percent. Dominated by a relatively small number of private speculators, Kosdaq is three times more volatile than Nasdaq. Few institutional or foreign investors dare gamble on Kosdaq, and after a series of stock-manipulation scandals, even Koreans are starting to edge away. Korea's leading venture capitalist, Jin Seung Hyun, was arrested early this year on charges of racketeering and trying to manipulate Kosdaq; the local press likens him to fallen American junk-bond king Michael Milken.

In retrospect, it is clear that many nations took the idea of low barriers and few rules too far, and wound up with markets far less orderly or discriminating than Nasdaq itself. When the Deutsche Borse launched the Neuer Markt in 1997, it planned to let in only "leading" tech companies, hoping to emulate Nasdaq's success with Cisco and Microsoft. But facing competition from rival newcomers like Easdaq in Brussels, the Neuer Markt relaxed the criteria to attract more listings. "They threw all quality control overboard," says Markus Straub, Neuer Markt expert for the Ger- man Association of Small Shareholders. Neuer Markt head Rainer Riess, in turn, blames investment banks for taking immature firms public.

The result: one scandal after another. German television marketer EM.TV saw its share price collapse after an investigation last December on charges that the company withheld profit warnings and CEO Thomas Haffa had secretly sold blocks of his stock in the company. Start-up star Stephan Schambach, 32, is now being sued by shareholders who accuse him of concealing financial trouble at his business-software company, Intershop. Since the trouble was revealed in January, Intershop stock has fallen 83 percent. Of 340 listings on the Neuer Markt, "only five or 10 are serious, solid companies," says Straub. "The whole country was gambling with the riskiest kind of stock."

Born at the tail end of a boom, the Nasdaq clones lured millions of first-time investors in nations with far less experience of stocks than their counterparts in the United States. The Neuer Markt helped spawn thousands of start-ups, a new breed of entrepreneurs, but also a near epidemic of flimflam. "From 100 Marks to One Million!" screamed Das Wertpapier, an ostensibly serious German investment journal, in a February 2000 cover on the Neuer Markt. On April Fool's Day, gullible Germans flooded brokers with orders for shares in wc.com and other bogus stocks talked up by Internet pranksters.

Now, private investors who used to make more than 50 percent of the Neuer Markt's trade are shying away. So is Gerhard Schmidt, CEO of MobilCom, the first company to go public on Neuer Markt. MobilCom is now a ¤5 billion company, but Schmidt is threatening to defect to Nasdaq Europe if the Neuer Markt doesn't do something to stem the scandals. "We don't want to be in the same boat with these people," says Schmidt.

To cut down on scams, the Germans launched a reform campaign in March. Under pressure from the shareholders' lobby, the Neuer Markt governors introduced American-style rules that require founders to disclose personal trades in their own company's stock. They also kicked out Gigabell, a flaky Internet service provider, for failing to report results, and started publishing lists of other delinquent members. Erlangen University economist Wolfgang Gehrke is working on a voluntary code of conduct to restrain German analysts from hyping stocks--but probably too late to recover public trust entirely. "Some of them will never touch stocks again," says Gehrke.

One problem with the Nasdaq clones was that many opened for business near the peak of the tech bubble in March 2000--and attracted many of the most greedy and dubious dot-coms. Italy's Nuovo Mercato, launched two years ago in Milan, has few rules at all, and almost any company can join. State authorities are now investigating many of the listed companies for fraudulent accounting, including several taken public by Fininvest, the holding company owned by the country's new president, Silvio Berlusconi. At Madrid's Nuevo Mercado--which has only 12 companies listed--trading is almost at a standstill.

The scene in Asia is just as depressed. New exchanges named at the height of optimism--Hong Kong's Gem, Taiwan's Tiger--are now stagnant. Launched as a draw for investors in Prime Minister Mahathir Mohamad's Multimedia Super Corridor a couple of years ago, Malaysia's MESDAQ has since attracted just three listings. Malaysia plans to fold MESDAQ into the larger Kuala Lumpur Stock Exchange next year. Singapore formed an early clone in 1987, but today SESDAQ is small, insignificant and shrinking. The only reason Singapore will ensure its survival, says a local fund manager, is to defend the island state's "claim to be a financial center."

That could backfire. Big investors have no respect for Nasdaq clones. Asked to name the worst of the Nasdaq clones, London venture capitalist John Bernstein thinks for a moment and says, "All of them." Davies of 3i says he mostly avoids small exchanges like Madrid's Nuevo Mercado or the Nouveau Marche in Paris. He expects and hopes that Nasdaq, Neuer Markt and Euronext--the new merger of the Paris, Amsterdam and Brussels exchanges--will fight to the death for dominance.

Nasdaq still dwarfs the competition. As of this week it will be the only market with U.S., European and Asian operations up and running, covering the major markets. Even within Europe, it is now "extremely expensive" to buy stock across borders, and "rather a nightmare" to orchestrate the actual payment and delivery, says Nasdaq Europe chief operating officer Jim Weber. To solve those difficulties, Nasdaq recently acquired Easdaq, a Belgian operation with continental ambitions that had designed an automated system to solve the practical problems of cross-border trades. "We're not imposing a U.S. model on Europe or Asia," says Weber. "Nasdaq Europe will be a European market for European investors, linked to a sister market in Asia and the U.S. and other markets, as we bring them online in the future." Sounds simple. Investors want one global exchange, not dozens. But the exchanges care more about survival than globalization.

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