What's Next for Asia's Exchanges : Consolidation or Competition?
As the markets’ appetite for change continues to grow, new operators will, where regulation allows, continue to emerge, offering more efficient alternative trading solutions at fraction of the cost of the incumbents. With new pricing models to contend with, exchanges face challenges across many of their revenue lines as lower-priced venues, such as Chi-East in Singapore, are already operating. Around the world, regulators continue to look closely at the costs of trading, clearing and settlement and how it relates to as well as its impact on competitive markets. Yet, as consolidation begins within the Alternative Exchange Venues (AEVs), it is logical to question whether the investor on the street will eventually benefit from these changes and what future steps regulators will take to protect the investment community at large.
In Asia, where the hurdles are compounded by regulatory differences and jurisdictional boundaries, participants and investors will have to continue to deal with a fragmented rule base and multiple market operators, each of whom has their own commercial agenda and shareholder mandates. Without a regional clearing house or a standardized settlement, clearing and connectivity process, the region’s markets will not reap any of the benefits that a shared regulatory framework; for instance, increases in liquidity and the advent of new venues, which often lead to the new capacity.
Although the region’s markets have been monopolies for years, is change finally on the horizon? The region’s exchanges, led in part by Singapore and Japan, are adapting to a world where regulation is quickly out-grown by the markets they are mandated to protect. For Asian exchanges, changes to market structure should include some basic requirements: first, the standardization of market connectivity and accessibility through FIX (i.e. allowing for a more equal market access is necessary to meet with recognized best practices), second, the long awaited need for common standards in trade reporting settlement and clearing across the region, therefore further reducing the transactional overhead, in what is often an expensive and onerous necessity.
As exchanges become like the companies they list, they often look more to their bottom line and their shareholders, which cause an unwillingness or acceptance that there is a necessity to change. In markets like Asia, where there are constitutionally or regulatory protected monopolies, it is often hard to predict whether change will ever happen. The question of course is where does this leave the investor? The signs of change are there. With new venue operators approved in Australia, Singapore and Japan finally setting up their own markets, the industry has sent a clear message to incumbents and regulators: exchanges must continue to provide a fairer and more transparent market for the benefit of the broader investor community. Everyone knows change is not easy, but there may be a light at the end of the tunnel. The potential merger of the Singapore Stock Exchange and the Australian Stock Exchange (awaiting approval at the time of writing) could be a sign that some exchanges waking up to the fact that competition has arrived, and therefore, they have to continue to strive for further reductions in costs and increases in market efficiencies. The continued pressure on Asian exchanges’ margins and their need to expand beyond their geographical borders will continue as their markets attract more liquidity. With new management in some of the region’s exchanges demonstrating that change is possible, with the possible consolidation of two of the most progressive exchanges in the region likely to happen and with the advent of services, such as arrowhead in Japan and the successful launch of Chi-X Japan and Chi-East, change is finally happening. While the final shape of Asian markets is almost impossible to guess, one thing is for certain - they will never be the same.