Bigger Than Ever.(financial market of New York and London amidst the financial crises)

Why the crisis will only help NyLon.

Financial crises tend to trigger overwrought predictions of major economic shifts--and then debunk them. Today's global economic meltdown is no different. In recent months, it has become popular to predict that New York and London (or NyLon, as they're together known) will soon lose market share as cities in the emerging world use the crisis to wrest away dominance. But history suggests that the opposite is more likely: that New York and London will actually increase in importance over the decade to come.

To understand why, it's important first to remember that boom-bust cycles are nothing new. Over the past two decades, as in previous periods of globalization, the world economy experienced massive growth in the volume of financial transactions. Banks got bigger and financial activity expanded dramatically. But past periods of globalization have always come to an end, usually in financial crises. These crises have always led to a credit crunch, a sharp decline in international trade and investment, and a subsequent collapse in speculative financial activity.

Yet in the past this process has always increased, not decreased, the dominance of big financial centers at the expense of smaller ones. The same thing is likely to happen today, for the same reasons.

Big centers have two huge advantages over smaller rivals: greater liquidity and larger networks. Big investors tend to flock to big financial capitals because they offer higher volume and lower trading costs, and issuers of stocks, bonds and other financial products follow the flock of investors.

Of course, smaller financial centers have advantages of their own: namely specialized access to information and favorable time zones. As a result, during liquidity booms these secondary centers benefit from massive increases in trading volume and financial activity. And as their pools of capital grow, they tend to retain their natural advantages while their disadvantages--lower liquidity and higher transaction costs--shrink in relative importance. Growing liquidity tempts more and more investors and issuers to move to smaller markets in order to exploit local conditions. This is just what happened in the past two decades, and markets in places such as Sao Paulo, Singapore and Bahrain profited accordingly.

When a liquidity boom ends, however, it tends to accentuate the advantages of big markets while diminishing those of smaller ones. The volume of financial transactions declines as does investors' appetite for risk, and the costs of buying or selling, especially for large trades, rise sharply. These changes all make smaller, less-liquid secondary financial centers seem ...