The effects of the global recession and a growing competitive threat from alternative trading venues are increasing the pressure on Asian stock exchanges, according to a new report from research and consulting firm Celent.
The report, titled ‘The Future of Asian Exchanges’, found that most Asian exchanges’ revenues and profits in 2008 had fallen compared with 2007 thanks to a decline in initial public offerings and a fall in trading volumes as a result of the crisis. For example, the Hong Kong Stock Exchange suffered a 10% fall in revenue and 17% fall in profit in 2008 and Bursa Malaysia suffered 35% reduction in revenue and 55% reduction in profit in 2008 compared to 2007. Celent said the case was similar with other Asian exchanges.
“Most exchanges in Asia are currently operating from a position of strength, with many acting almost as natural monopolies,” wrote Celent analyst Arin Ray, author of the report. “However, with the weakening market activities and emergence of alternative trading systems, the future may pose difficulties for many of these exchanges.”
The report pointed out that alternative trading systems are finding it more difficult to set up in Asia than the US or Europe because of local firms’ reluctance to trade off-exchange, disparity of currencies, time zones and regulatory requirements and low levels of crossing technology. In addition, it said the off-exchange platforms that exist in Asia are not operating as true alternative exchanges. In Hong Kong, for example, alternative trading systems operate as exchange members without independent price discovery and have to report transactions to the exchange.
Nevertheless, the report adds that exchanges should not dismiss their new rivals. “The European exchanges are beginning to feel pressure to reduce their tariff structures because of the ATSs. With the development and growth of ATS, the major Asian exchanges are also likely to feel similar pressures in the future; hence, in the long term innovation in terms of tariff structures would be key,” Ray wrote.
The report noted that the major Asian exchanges are revising their pricing and products, as well as upgrading their systems to support greater speed, better connectivity and faster market data services. For example, the Singapore Exchange is taking a range of initiatives to boost algorithmic trading on its platform, including infrastructure improvements aimed at reducing latency, reduction of tick sizes and spreads for equities introduction of proximity hosting services, and consideration for revised fee structures to attract more volumes.
Celent highlighted opportunities for exchanges in four business segments – listing, trading, new products and markets, and systems. For trading it suggests there is scope for innovations in tariff structure in the long run, such as introducing maximum fees for frequent. Trading opportunities also exist in the development of cross-border trading in the region, the firm said.