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With a capacity to trade 6 billion shares a day, Nasdaq is the single largest equities market in the world. Between 1997 and 2000, the exchange raised $316.5 billion in capital for the high-tech sector and brought 1,649 companies public. Now, Nasdaq itself is expected to go public by the end of 2001. With its planned expansion into Europe, the exchange is moving the world closer to seamless international capital mobility.

However, Nasdaq hasn't been immune from forces both here and overseas. The bursting of the bubble in high-tech stocks - Nasdaq's key constituency - knocked down its number of listings by 6.3 percent between Jan. 1 and July 1, according to The Wall Street Journal. Nasdaq laid off 11 percent of its workforce in late June, and has been finding receptivity to its overseas expansion a bit chilly, especially in Japan, where it signed up only half of the companies it had projected to list in its first year there.

Frank Zarb is chairman of the National Association of Securities Dealers and the Nasdaq Stock Market, and has been the point man for Nasdaq's initiatives in the U.S., Europe and Japan. Zarb, who plans to step down later this month, is at the tail end of a career spent largely in and around Wall Street, which gives him a valuable perspective on the state of stock markets here and around the world.

Zarb, 66, has been Nasdaq's chairman since 1997. Prior to that, he spent three years as chairman and CEO of Alexander & Alexander Services Inc., the global insurance broker and risk management firm. Earlier, he was vice chairman and group chief executive of Travelers Inc. and chairman and CEO of Smith Barney, then a Travelers subsidiary. As a senior official in the U.S. government, Zarb served in the administrations of Presidents Nixon, Ford, Reagan, Bush and Clinton.

In an exclusive interview with Financial Executive, Zarb spoke about such issues as global capital mobility, the international expansion of Nasdaq and exchange-related standards.

Q. You've seen the United States investment climate evolve over the course of five presidential administrations. How would you compare the investment environment now versus 10 or 20 years ago?

A. The most important development in the equities markets over the last 25 years is this trend toward democratization. The world as a whole has moved to a model where more and more average people are participating in the equity of companies and thereby sharing in the wealth they help to create.

In the U.S., we've had an enormous increase of individual participation over the last 10 years. The trend line is up, and that has a material impact on the depths of the securities markets. It also has had a significant impact on the political dimension of U.S. society, and will have similar implications internationally as private citizens become involved in national and international equities markets.

Q. Would you say the political climate in the U.S. has been an incentive for that?

A. The markets are opening themselves to average investors. This is partially because of government liberalizing and making it safer to participate, and I don't downplay that, but more importantly, companies wanting their employees to participate in earnings is an economic strategy designed to keep employees who are productive. So now we have 10 million Americans who own stock in the company they work for.

The whole issue of 401(k)s and the use of various pension funds is [intended] to improve the quality of company balance sheets and at the same time keep employees happy. Sen. Joe Lieberman (D-Conn.) said, "The capital gains issue is no longer an issue that only affects rich people." That's a liberal Democrat who traditionally would have been opposed to liberalizing capital gains. He's saying exactly what is happening: For the first time, large numbers of average people are paying capital gains taxes - so the capital gains tax has a political dynamic to it that it never had before, because investors vote.

Q. Do we see the same climate prevailing in Europe?

A. Not quite yet, but it's getting there. It's starting to move in that direction in the U.K. [United Kingdom], and I think the Continent is not far behind. But the U.K. shows every evidence to us of having [taken] exactly the same path as we have here.

Q. Technology is far ahead of the institutional infrastructures and the cultural infrastructures that are able to support it, particularly in terms of global capital movements and it's regulation. What does this imply for Nasdaq Europe? Is the Continent and its political and regulatory infrastructures ready for Nasdaq?

A. That's absolutely correct about technology. The technology that allows the movement of capital from continent to continent is way ahead of some of the institutions that need to make it happen.

The global investment banks are the first change agents. I'm talking about the Merrill Lynches and the Goldman Sachses and the Smith Barneys. They are already there, and [are] fast transforming the rest of the institutions. The traditional stock exchanges have been very parochial and almost creatures of their national enterprises. All that is beginning to change, and Nasdaq Europe (which recently acquired control of Easdaq) will probably ultimately join forces with one of the other major pools of liquidity in Europe.

Nasdaq is part of the movement towards making it easy for companies to acquire capital away from their home [bases]. Microsoft and Starbucks will trade in Tokyo, so a Japanese investor during [his or her] working hours will have the opportunity to invest easily. Today's scheme doesn't facilitate that. The same obviously applies to Europe as we move around the world. Later this year, Nasdaq stocks will be trading in Tokyo, and by the early part of next year, they will be trading in Europe.

Q. What would you say are some of the major challenges in bridging the technology-institution gap at this time?

A. We do our share with taking the initiative in Asia, Europe and in Canada. There is no other market in the world that operates across borders the way we do. And that's only [during] the last couple of years, so we have had to break new ground and take some risks in doing it and make an investment in time and energy and people to get it done. It takes a lot of hard work and some courageous political leadership locally. [Great Britain's] Chancellor of the Exchequer was our biggest helper in getting Nasdaq started in Europe. As he told me, his job is to build an economy and create jobs and not to protect old institutions. That kind of thinking is fairly unique in the world, but growing.

Q. Are international accounting standards and a uniform regulatory regime a precondition for the exchange of equities between Tokyo, Europe and the U.S.?

A. No, not really, because Nasdaq 100 stocks can trade in the U.K. tomorrow without having to register. They just trade with the exchange. They can trade in Germany tomorrow on a Nasdaq platform. So from that standpoint, that's not so. But for us to trade European stocks here on a Nasdaq platform, they would have to become registered. And since companies need to raise capital in other venues, they can begin to use their political clout to force governments into harmonizing listing standards.

The International Accounting Standards Board (IASC), which we support, is hard at work in that area, and I suspect that the SECs (Securities and Exchange Commisions) of the world are going to come under increasing pressure to harmonize their standards - not to lower them, because the integrity of the market is that important in this new democratized environment. You still need maximum transparency. You need complete distribution of information, you need complete honesty of information and you need untainted analysis. You want to make the standards interchangeable, so that they show you the same result. I suspect that sometime in the next two to four years, you are going to see a major breakthrough in that area.

Q. In the last two or three years, fears over currency crashes have increased concerns over capital reserve requirements in international financial institutions. At the same time, there's been talk of restricting the movement of foreign indirect investment between countries to minimize contagion in world currency and financial markets. What are the current dangers of increasing market interdependence when we can't yet seem to prevent economic viruses from spreading rapidly from country to country?

A. There's always a movement of people who want to return to the environment of the former days when equity markets were pretty much a bunch of rich guys selling stocks and bonds to a bunch of other rich guys. Especially when you hit a unique market and market cycle, there's always a chorus of people who would like to return the environment to that condition, because that's where their market model had the most profitability.

It will never happen. The fact is that the equity markets are designed to build companies through the acquisition of capital, and that increases jobs and increases the pay for jobs, which increases the welfare of people.

Q. You're quoted as commenting on maintaining the business culture within the European community and operating Nasdaq accordingly. If you're trading between the U.S., Europe and Japan, how do you maintain local business culture and transparency at the same time?

A. You have to insist on those standards being complied with. In Japan, there is a different culture, and we have to make sure that the companies that list on Nasdaq Japan comply with the Nasdaq standards because we can't risk our brand. So, wherever we are, we take that approach. In Europe, certainly in the U.K., it's not a big problem because the filing requirements are very similar. In other parts of the world, it's a little spotty, but getting better.