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.
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.