Escape From New York

Will Luxembourg replace Manhattan as the world’s financial capital?

Can Wall Street stay bullish?

Last Friday, Nadaq revealed that it had made an unsolicited offer to purchase the London Stock Exchange. The LSE politely declined the offer from its much younger rival.

At first glance, the bid seems like another case of an aggressive, triumphant Wall Street bringing American-style capitalism to the old country. After all, despite the lackluster stock markets, Wall Street firms like Goldman Sachs had a banner year in 2005. And the values of Wall Street are ascendant and spreading throughout the globe. Last week, the New York Stock Exchange went public after more than two centuries as a private association, and its shares popped 25 percent on the first trading day.

Yet Wall Street may prove to be a victim of its own success. For while they’re still making money hand over fist, New York-based financial institutions are seeing their global positions erode. In today’s flat world, capital is being formed all over the place, especially in the so-called BRIC bloc—Brazil, Russia, India, and China. (By running up gigantic debts and a huge trade deficit, the United States is contributing to the trend.) And there are growing signs that capital formed offshore is choosing to reside there.

It has long been an article of faith that New York is the home base of global capital. But what happens if that stops being true? According to the most recent monthly report from the World Federation of Exchanges, the NYSE and Nasdaq combined had $16.9 trillion out of the world’s $41 trillion in stock market capitalization in December 2005, or 41.2 percent of the world’s total. That’s impressive. But it’s down sharply from January 2001, when the NYSE and Nasdaq combined held 48.4 percent of the world’s stock market capitalization.

Meanwhile, fewer foreign firms that trade on foreign exchanges are choosing to list their shares on American exchanges through a mechanism knows as “depositary receipts.” The Financial Times reported today that some 7 percent of the firms with American depositary receipts—nearly three dozen—chose to delist them last year, thanks to Sarbanes-Oxley regulations and a lack of interest from individual investors. According to the Bank of New York, of the 106 non-U.S. companies that started depositary receipt programs last year, only 29 listed in the United States, while the London Exchange and the Luxembourg Stock Exchange attracted 50 between them. Most of the Indian firms creating depositary receipts did so in Luxembourg.

A similar—and potentially more worrisome—dynamic is playing out in the lucrative market for initial public offerings. Rosneft, the state-owned Russian oil company, plans to divide its massive upcoming $15 billion IPO between Russian stock exchanges and the London Stock Exchange. The largest IPOs of Chinese firms—like China Construction Bank’s $8 billion offering and the upcoming IPO of Industrial & Commercial Bank of China—are going to the Hong Kong exchange. Dubai opened the new Dubai International Financial Exchange last fall. And earlier this month, Saudi Prince Alwaleed bin Talal, the huge investor in Citigroup and other American firms, used the exchange to take his Kingdom Hotels company public in a significant offering.

New York-based firms do participate in many of these deals. Goldman Sachs and Morgan Stanley have had a hand in most of the large Chinese IPOs. But all the activity overseas doesn’t create new jobs for floor-traders and brokers in Manhattan—or for all the people who service New York-based investment bankers, from clothiers to strippers.

Meanwhile, the NYSE, Nasdaq, and New York-based firms are facing domestic competition. The business of creating and trading derivatives—futures, options, and various other instruments whose value derives from the value of other instruments—is booming. And much of the action takes place in Chicago. The Chicago Mercantile Exchange, which trades commodities and futures, went public long before its Eastern rivals. Its stock has risen nearly tenfold in the past three years, as this chart shows.

New York may be losing market share in hedge funds, too. (Manhattan real estate has become so expensive that not even hedge fund managers can afford to live there comfortably.) Greenwich, Conn., about 30 miles outside of New York, has emerged in recent years as the capital of hedge-fund capital. Financial Times reported today that “an estimated 380 hedge funds with assets in excess of $150 bn call Greenwich home.” The town is so thick with hedgies who want to work near their palatial homes that prime commercial office space costs more than it does in midtown Manhattan.

Meanwhile, Stamford, Conn., just a few miles up I-95 from Greenwich, has emerged as a huge financial center in its own right. It currently houses the world’s biggest trading floor, which is operated by a non-U.S. bank (UBS). But UBS’ floor won’t be the world’s largest for long. Another European bank, the Royal Bank of Scotland, is considering building a new headquarters for its trading unit that would have the world’s largest trading floor. It would be in Stamford, too.

New York may still regard itself as the world’s financial capital, and justly so. But if current trends continue, it will be home to a smaller portion of the world’s capital.