Changes in global investment flows offer exchanges in the Asia-Pacific region a unique opportunity for growth if they can cater for the needs of global institutional investors, delegates were told at an exchange conference in Singapore on 18 October.
Speaking at the World Exchange Congress Asia 2011, Seth Merrin, chief executive of buy-side focused block-crossing network Liquidnet, warned Asian exchanges not to forget their institutional customer base in favour of chasing transaction fees from high-frequency trading (HFT), while Bursa Malaysia chief executive Dato’ Tajuddin Atan urged local bourses to change their business models.
Merrin explained that while exchanges were chasing the transaction fees derived from HFT execution, such behaviour often made the exchange environment unattractive to institutional investors. “Exchanges are courting HFT players, but they are often forgetting the essential needs of institutional investors,” he said. “These two differing customer bases do not need to be mutually exclusive and the growth of HFT should not be at the expense of institutions.”
While it was important for national regulators to protect retail investors and provide equal access to regulated exchanges, Merrin insisted exchanges were not beholden to treat institutional and retail investors the same.
“Every other industry has a retail and a wholesale model,” he said. “You don’t go to a local store to buy 6,000 red shirts. Likewise, institutional investors should not be treated the same way as retail investors.”
Earlier this year, Liquidnet announced a partnership with SIX Swiss Exchange that enabled trading members to place blocks in the firm’s institutional crossing network. Merrin said he was currently in discussions with Asian and European exchanges to promote the concept. He argued institutional investors needed to be given the choice whether or not – and when – to engage with HFT.
Merrin implored Asian exchanges to change their architecture to create safe and efficient markets for institutional investors to attract capital from around the world and create new revenues. However, he believed Asian exchanges were severely restricted by disparate national regulations, relatively lower levels of technology at exchanges and brokers, and market structures in need of improvement. While he believed Asian exchanges should continue to be national and protected, there was also a need to broaden their international reach and access for global institutional investors.
“Consolidation of exchanges is not necessarily the solution in Asia, and mergers are not a do or die issue for national exchanges,” he said. “But unless they eventually raise their competitiveness, Asian exchanges will not be able to grow to the levels needed to continue the capital growth required in the region.”
Bursa Malaysia’s Atan agreed. “Regulation in Asia shields exchanges from competition, but an exchange is just a marketplace, and the barriers must eventually come down.”
Atan echoed the need for Asia’s exchanges to become competitive on a global scale, by modifying their business strategies to better serve their local and international clientele.
“Once more, Asia has been caught in the slipstream of a Western drop in the markets, but emerging markets now have more weight on a global scale,” he said, explaining that most Asian economies now possessed superior cash reserves, stable balance sheets and increasing wealth. Now was the time to take advantage of the global flow of funds from Europe and the US, but Atan warned Asian exchanges must also look to their own region to service local customers.
Atan, whose exchange is a member of the recent ASEAN exchange collaboration between seven south-east Asian markets, called on exchanges to review their offerings to domestic clients.
“Investors want good pickings, low cost of entry, protected – but not restricted – markets and freedom of choice. Otherwise, they will go somewhere else to invest,” he said. “Asian exchanges need to be more aware of alternative venues. They no longer operate in an insular domestic market.”
Of the ASEAN initiative, Atan said the new partnership would only bear fruit if it represented “clear value” for customers. He warned Asia not to follow the same “high regulation” path as Europe and the US, insisting good governance and integrity was critical for confidence but adding that regulation needed to help economies thrive, rather than limit innovation and capital development.
“The regulatory framework must move fast. ‘Cookie cutter’ regulation is not right for Asia,” he said. “Regulation needs to look at what the customer needs – and that is speed, access, freedom and protection.”
The ASEAN Exchange collaboration was formally launched 8 April, 2011. Seven exchanges in six countries have signed up to cooperate: Bursa Malaysia; Hanoi Stock Exchange; Hochiminh Stock Exchange; the Indonesian Stock Exchange; the Philippines Exchange; Singapore Exchange; and the Stock Exchange of Thailand.
Atan said it was important for south-east Asian exchanges – which comprise over 3,000 listed companies and represent US$1.8 trillion in GDP – to form a compelling asset class in their own right, to compete with the BRIC economies of Brazil, Russia, India and China.