What's Next for Asia's Exchanges : Consolidation or Competition?

Robert Rooks, Independent Market Consultant, questions the current Asian equities market infrastructure and statesthe case for greater competition.

As listed companies, many of Asia’s bourses, like the companies they list, are under constant pressure to reduce costs and return an ever increasing value to their shareholders. This pressure is driving exchanges to invest in or consolidate with other exchanges to continue to offer value to the investors. Market participants, themselves, are questioning whether these so-called ‘global alliances’ will increase market access, reduce costs and return real profits to investors. Consolidation is often a consequence of economic circumstance with any perceived benefits eventually trickling through to the end customer, or in the case of exchanges, the market participants and finally, to the investment community.

Change needs to be spread wider than just the exchange level, to include clearing houses. In Asia, the exchange often owns and operates its own clearing houses, leaving one to wonder whether any savings made on the exchange are clawed back through the clearing and settlement process, given the vertical silo monopolies that they operate. Arguably, this is why the region’s exchanges have the largest market cap and remain some of the most profitable in the world. With continued advances in technology and the advent of new venues it is realistic to assume that this would lead to a reduction in the cost of trading through uniformity and efficiencies? If this is the case, why is the transactional cost of clearing and settlement still far higher in Asia than in other regions?

It would appear from the US and European markets that competition, not consolidation, is what drives costs down. In Europe and the US, the emergence of new trading venues and market operators has led to increases in market efficiency, as well as a substantial reduction in costs. New venues have necessitated new clearing solutions, such as the European Multilateral Clearing Facility (EMCF), further reducing the costs of clearing and settlement. Along with new entrants reducing execution fees, the EMCF has contributed substantially to the increases in liquidity and improved transaction cost transparency.