The proposed merger of the Australian Securities Exchange (ASX) and the Singapore Exchange (SGX) presents a great strategic fit in principle, but the process of implementing it will be a long haul, market participants say.
With both the ASX and SGX powered by Nasdaq OMX's Genium INET trading technology, the merger of the two exchanges will create a single multi-asset platform with a single access point within Asia-Pacific, thus lowering trading costs and increasing technical efficiencies.
“Potential synergies from the combination will lower transaction costs and provide ultra-low latency access for higher-turnover strategies, thus competing well with the oncoming Chi-X Australia as well as creating a more solid battlefront should the Hong Kong Exchange, with its backers in Beijing, decide to attempt to play a larger role in the region,” says Paul Rowady, senior analyst at TABB Group.
“The deal is about competing to provide the most liquid portfolio of products in one of the most economically attractive regions in the world,” he adds.
ASX and SGX have proposed forming a new holding company – ASX-SGX Limited – to be listed on both the Singaporean and Australian exchanges. The combined group will be the world's fifth largest exchange group with a combined market capitalisation of approximately US$12.3 billion and offering access to more than 2,700 listed companies from 20-plus countries as well as a wide range of equity, fixed income and commodity derivatives. As well as the approval of both sets of shareholders, the deal is subject to regulatory approval by the treasurer of the Commonwealth of Australia, the Australian Securities and Investments Commission and the Monetary Authority of Singapore.
Robert Laible, head of electronic trading services and program trading sales, Asia-Pacific, Nomura, says, “Many exchanges in Asia are viewed as crown jewels and are protected by monopoly status. But those that are public companies also have shareholders and must produce quarterly revenues and deliver growth. It no longer suffices to say, ”I hope the market goes up. I hope people will list on my exchange'. There actually has to be a more compelling reason why a company wants to list on a given exchange. The fact that there are joint initiatives underway, whether it's the ASEAN markets, or a merger between ASX and SGX, I think it makes sense.”
But Credit Suisse research analysts Anand Swaminathan and Sanjay Jain do not expect significant revenue or cost synergies from the deal. “SGX and ASX have been involved earlier in a cross-trading link, which failed to take off due to lack of demand and liquidity,” they wrote in a report dated 25 October. “ASX provides SGX with a much bigger liquidity pool (three times SGX's equity turnover), but much less profitable and a less attractive future growth profile. ASX's profitability is expected to decline further due to competition risks starting next year,” they added.
From a trading perspective, the ASX/SGX merger will be beneficial in terms of lower costs and easier access to their markets. Laible says, “Over time, as the technology platforms begin to merge into a single version, it will be much easier from a trading perspective because you only have to write technical specifications to one interface and you get the benefit of two different exchanges. If you think about the order types that different exchanges support, you'd hope that over time, all these things get unified. You would also hope that the back office and clearing get unified, which would reduce fees.”
Toby Lawson, head of futures and options and cash equities execution, Asia Pacific at Newedge Financial Hong Kong, holds the view that although the proposed merger should create cost synergies and possible capital efficiencies, achieving the full potential of that will be a stretch. “The ASX bought the Sydney Futures Exchange (SFE) more than four years ago and they still run two distinct operating models in terms of infrastructure. So there's been minimal synergies from a participant and trading perspective from the ASX/SFE merger. The ASX/SGX merger will probably not deliver some of the synergies that they are saying because they’ll need to maintain separate operating models, driven by regulation as much as anything. The technology is one element, but the regulatory financial requirements in terms of capital commitment to the exchanges, having separate membership criteria and other rules and regulations, all suggest that the synergies that will take a long time to be achieved.”
Laible feels that the ASX/SGX merger could potentially accelerate the formation of the ASEAN trading link, of which SGX is a participant. “Once you have some consolidation, what quickly becomes apparent is everybody looks to see how they are positioned and nobody wants to be the odd man out. Everybody wants to partner with someone that creates some kind of synergy. If you look at the underlying technology, and you’re both using the same platform, do you really need to be supporting two versions of it with the same amount of upgrades and dollars that go to support that? If that platform happens to be Nasdaq OMX, then all you really need to have is one version of the technology and other exchanges that might have that same technology will say, ”That’s the right group for me to join because I can instantly create synergy from a technology perspective'. Others might say, ‘My economy is very resource-based and to diversify resources companies listing, maybe I should partner with another exchange that has more financial conglomerates or real estate companies'. As an exchange you’re trying to smooth your earnings and if you're a one-trick pony, then you're really going to be nothing more than a proxy for the underlying stocks that are listed on your exchange,” Laible adds.
Peter Fowler, chief operating officer of Chi-X Australia, says it is now even more important for there to be clarity and timely resolution concerning the rules and regulatory environment for multi-market platforms so that the Australian government can enable its in-principle approval for Chi-X Australia to operate. “The proposed takeover highlights the need for Australian investors to experience the benefits of competition in trading platforms – lower trading costs, more innovation, a stronger market structure, more liquidity – that Chi-X platforms have delivered in other markets,” he says. “Exchanges do not own liquidity – investors in the market, from the smallest retail investor to the largest international institution, do. Investors will gravitate to markets with the most efficient platforms structures and it is important that Australia has a multi-platform environment to encourage cost competition, innovation and greater market liquidity.”