The tale of two cities

London vs New York
With some $100 billion in foreign investment pouring in annually from countries like Russia, India, China and the US, London is challenging New York very seriously in the race to become the financial capital of the world. British PM Gordon Brown recently pointed out that over 40% of the world’s foreign equities are traded here as also 30% of foreign exchange. And unlike New York and Tokyo which are backed by large domestic markets, London’s business is truly global.

In contrast, as Fortune magazine recently reported, New York seems to be plagued by self doubt. Too much litigation and heavy handed regulation are factors cited behind this phenomenon. US Treasury secretary, Henry Paulson and Christopher Cox, Chairman of the SEC have called for reforms to revitalize the US capital markets. While the US is weighed down by Sarbanes Oxley, London seems to have been quite successful in putting together a new, more flexible regulatory approach that makes it easy to do business, regardless of nationality, currency or accounting system.

London has become a magnet for firms from emerging economies looking to raise capital. In fields like OTC derivatives, foreign exchange and metals trading, it has taken a worldwide lead. About 21% of global hedge fund assets are handled from London. The city has also been successful in attracting hundreds of smaller firms from around the world, including the US to its less prestigious markets, especially the AIM exchange.

New York is trying to stage a comeback. NYSE and Nasdaq are trying to merge with London’s European rivals. The SEC has recently accepted the International Financial Reporting Standards that differ from the US GAAP. The SEC has also relaxed Section 404 of SOX which stipulates that outside auditors must monitor internal controls.

Ironically enough, much of the expertise fuelling London’s boom is American. Four of the top five deal makers in the US last year, were American. Meanwhile, both London and New York cannot overlook competition from other centres like Mumbai, Shanghai, Warsaw, Dubai and Sao Paulo. Looks as if the days when one or two cities dominated international finance are over.