Global Market Structure
Exchanges' Crossing | Asia's Alternatives | UBS's Leibowitz: On the ATS Front Lines | Harris: A Microscope on Microstructure
Asia's Alternatives
May 14, 2007
According to Neil Katkov, a Tokyo-based analyst with research firm Celent, the exchange consolidation trend is truly global, and understandably extending to Asia. "There is a competitive need to stay ahead of the game in the global exchange market," he says.
It looks to some experts like a game of musical chairs, with the player standing alone at the end seen as the loser. "This is very much a network business," says Benn Steil, director of international economics at the Council on Foreign Relations in New York. "The larger you are, the more money you make, and the more people trading on the platform, the more benefit for the traders. If you don't achieve a large size, you're at a competitive disadvantage."
But there are rules of the U.S. and European exchange game that don't apply in Asia. For one thing, U.S. exchanges operate with a single legal framework, a common language and currency. Europe, though not entirely unified on the euro, has a far more manageable currency structure than Asia and has coalesced on a common legal framework that is continuously bringing more countries into the fold. In addition, English has become the de facto language of the securities industry, which makes it compatible with the U.S. but not with all Asian markets.
Thomas Kloet, a former CEO of the Singapore Exchange who is now senior executive vice president and COO of Fimat USA, a U.S. brokerage unit of Societe Generale, sees Asia as by far the most complicated area for a cross-continental exchange merger. Besides the currency, language and jurisdictional inconsistencies, he says, stock exchanges are matters of national pride.
The Tokyo Stock Exchange (TSE), notes Celent's Katkov, is "marginalized by design. Its strategy is to maintain itself as a single important market. I don't think it's interested in a regional merger."
In Hong Kong too there is a strong nationalist orientation. The board of the stock exchange is appointed by the Hong Kong government, says Simon Luk, partner and head of the Hong Kong practice of Heller Ehrman, which is headquartered in San Francisco. "It is unlikely that a government-appointed board of the Stock Exchange of Hong Kong will offer itself up for sale and engage in merger activities," he says.
Intra-country Action First
The result, experts say, is that while cross-border exchange consolidation may come to Asia within a generation, the near term is more likely to see consolidation within countries, arm's length exchange linkages rather than full mergers, and the rise of alternative trading systems (ATSs).
Japanese regulators have already set in motion a merger of TSE with three smaller commodities exchanges there. In-country mergers could result in economies of scale, operational efficiencies and increased liquidity. They also avoid having to deal with the complexities of cross-border tie-ups, while also strengthening the merging markets for when those bigger deals begin to take place.
