Introduction

Free Europe (which, in the long run, may be all of Europe) is moving quickly to become an integrated marketplace without internal frontiers, with free movement of goods, persons, services and capital. In particular, Europe of 1992 and beyond will approach the state of a unified market in which firms issue securities on a European-wide basis. Given the important role of liquid secondary (trading) markets for capital formation and their crucial effect on the cost of capital (Amihud and Mendelson, 1986, 1988, 1989c), the structure of the European capital markets after 1992 is of paramount importance. In this paper, we focus on the following question: how should the unified European Community integrate trading in its securities markets, especially for those firms that will raise capital on a European-wide basis?

This question is not as futuristic as it may appear at first. In a number of countries (Italy, Spain and Switzerland, to mention a few examples) there are efforts underway to integrate existing local exchanges and form national securities exchanges. Turning to the case of integration across countries, the European exchanges have looked in a variety of settings at the question of unification either on a European-wide basis or on a regional basis (e.g. establishing a Nordic stock exchange). The general sentiment so far has been against establishing a single European Community exchange and in favour of preserving the existing national (and sometimes regional) stock exchanges. However, it is expected that there will be substantial cross-listing of securities in the different exchanges, continuing the current trend.