The alliance of European stock exchanges, launched with great fanfare in 1998, is fast approaching the end of its useful life. The alliance does have some achievements to its credit, such as reaching agreement on harmonising trading rules within Europe.

However, it has been a tortuously slow process and it is now clear to all that the alliance is not going to produce the single pan-European trading platform that customers want. Trying to hammer out a deal with eight different national exchanges all eager to protect their status and jobs has proved impossible. Consolidation of Europe's numerous stock exchanges is now going to happen through a process of mergers and takeovers. This is what the big bourses are limbering up for. Last week the London Stock Exchange (LSE) unveiled its plans to move from a mutually-owned organisation to a public company with traded shares. And shareholders in Deutsche Börse will vote in May on a plan to widen the shareholding base, possibly through a flotation, and rename the exchange Euroboard. For the LSE, the importance of the ownership restructuring should not be underestimated. The present management has done a good job of cutting the bloated cost base and making the organisation more efficient. But no-one should underestimate the cultural impact of moving to an explicit for-profit model. It will make it easier for management to take tough decisions quickly without being hampered by laborious consultation or interference from vested interests. The 4.9% limit on shareholdings is a sensible temporary measure. It would have to go if and when the LSE floats. But in the meantime, it will allow time for the shareholder base to settle down as smaller members sell out, while preventing any of the big players becoming too influential. Although it is the big securities firms that have been rightly prodding London and the other exchanges to merge, their influence on the LSE has not always been benign. After all it was Merrill and BZW which initially resisted an electronic order book in London because they feared it would hit their profitability. Besides the change in ownership structure, the LSE has been preparing for the next stage of the battle by developing plans for a central counterparty. But this will not be ready until the first quarter of next year, and while the LSE is taking the right steps, the big worry for member firms is that it is not moving fast enough. At some point the alliance members are going to break ranks, and it looks increasingly likely that Deutsche Börse will be the first to do so. One possibility is that it will try to build up trading in all the big European stocks on its Xetra trading platform. However, attracting liquidity away from other national markets will be a difficult task for any exchange on its own. This means that mergers, which bring together existing pools of liquidity, are likely to be the way forward. What is likely to happen is that through a process of mergers we will initially end up with two or three competing pan-European exchanges – one centred around Deutsche Börse, another based around the LSE or ParisBourse and another involving some of the new competitors such as Tradepoint, Nasdaq or Easdaq.At the end of the day the winner may well prove to be the exchange that can solve the costly business of cross-border share settlement in Europe. Compared with the US, it is cheap to trade shares in Europe because the existing exchanges with their electronic order books are relatively efficient. However, settlement is fragmented and more expensive than in the US. The potential for cost-savings on settlement compared with trading in Europe is probably about four to one. Any exchange that can solve this will be on to a winner. But that in turn involves dealing with Europe's depositories, which are as reluctant to merge with each other as the stock exchanges.