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Asia-PacificSeptember 1 2011

Asian exchanges up the pace of progress

Exchanges across Asia are competing harder than ever with their Western counterparts, and are at the forefront of technical advancements within the trading world. Magnus Bocker, CEO of the Singapore Exchange, looks at why the Asian market is so vibrant right now.
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Asian exchanges up the pace of progressMagnus Bocker, CEO, Singapore Exchange

We live in interesting times. In the midst of debt crises in Europe and the US, and economic uncertainties in most parts of the western hemisphere, Asian economies continue to grow at very respectable rates.

Therefore, the world’s economic centre of gravity will continue to move out of its mid-Atlantic location along a trajectory aimed squarely at India and China, wrote London School of Economics professor Danny Quah in Singapore’s Straits Times in June. Asia is slowly assuming a new role of economic leadership.

This is a leadership that by 2020 will contribute to 55% of gross domestic product (GDP) growth and constitute 43% of global GDP, double where we are now. In addition, 43% of global trade will come out of Asia, which is fundamentally different from the current position.

Change in the exchanges

More than ever before, exchanges in Asia play an important role as conduits of capital flows, facilitating efficient allocation of capital into good businesses, leading to job creation, long-term investments and infrastructural developing that ultimately benefits the economies and countries we serve. Data on share trading from the World Federation of Exchanges already show Asia’s increasing importance. The value of shares traded in the US fell 11% year on year in the first half of 2011, and 1% in the whole of 2010. In contrast, share trading in Asia rose 14% in the same period and 5% in the whole of 2010. In terms of fund-raising, some 52% of initial public offerings this year are from Asia, which accounted for 60% of the global sums raised. This came despite the fact that only 30% of the companies going public originate from Asia. 

Asian exchanges are competing well with their Western counterparts. As the business of exchanges becomes more competitive, Western exchanges have pursued consolidation so as to provide better scale. Given that competitive pressures are bound to increase, 'bigger is better' is a mantra that Western exchanges are unlikely to forgo any time soon.

Notwithstanding the attempted merger between the Singapore Exchange and Australian Securities Exchange (ASX) to create the premier international exchange in Asia-Pacific, Asian exchanges generally do not have the same appetite or opportunity to consolidate.

There are various reasons for this. Many Asian countries are at varying stages of economic development compared with those in the West, and even compared with each other. Their financial systems also vary – some have foreign exchange and capital controls while others do not. Across Asia, regulatory regimes are developing at different paces. Often viewed as strategically important national assets, many exchanges in Asia are not demutualised and continue to be owned by their members. These differences make it more difficult for Asian exchanges to consolidate. But perhaps a more compelling reason why most Asian exchanges are focusing on organic growth is the tremendous growth potential that is right on their doorsteps.

New technologies

Asian exchanges have invested heavily to tap this potential. In 2010, ASX, Hong Kong Exchanges and Clearing (HKEx), Tokyo Stock Exchange (TSE) and SGX announced or rolled out significant new technologies. The TSE was first off the block with its January 2010 launch of Arrowhead, which it said was designed for "high-speed order placement and execution processing, and to respond to reductions in sizes of orders and rapid increases in the number of transactions". Arrowhead has an order response time of five milliseconds (or 5000 microseconds) and could handle close to 5 million orders a day at its launch.

HKEx – which is increasingly a proxy market for China – said in March 2010 that it will improve trading latency, capacity and functionality in the years ahead. In November 2010, ASX rolled out a new trading system with latency of 300 microseconds and which will allow capacity to rise to 100,000 orders a second from 20,000 previously.

SGX itself announced in June 2010 a S$250m ($207m) technology investment in the world’s fastest trading engine – Reach, the state-of-the-art SGX data centre offering co-location services, and communication links with other international financial centre via points of presence. Three of the four-pronged initiatives already operate, the latest being the successful roll-out of Reach on August 15, which offers 10 times more capacity and ultra-low latency of less than 90 microseconds. SGX has also focused on developing its positioning as the Asian gateway by improving the micro-structure of its markets. These improvements include keeping the securities market open all day between 9am and 5pm, increasing the overlapping hours with other Asian exchanges. SGX also has reduced minimum bid sizes of most securities, thereby reducing its trading costs to be the lowest in Asia.

SGX is also proposing to introduce circuit breakers in its securities market and we have kept abreast of international regulatory developments with new products and services. Amid rising concerns about counterparty risks of over-the-counter (OTC) transactions post-Lehman, we were the first in Asia to offer central counterparty clearing of interest rate swaps. More than S$156bn in notional value of interest rate swaps have been cleared since the November 2010 launch and SGX intends to expand its clearing of OTC financial derivatives to Asian currency forwards. To be introduced by the end of 2011, forwards to be cleared will include those of the Chinese renminbi, Indonesian rupiah, Korean won, Malaysian ringgit, Taiwanese dollar and Thai baht.

Moving forward together

Exchanges in Asia are also banding together to promote their products and services. In the first quarter of 2012, Bursa Malaysia, the Philippine Stock Exchange, the Stock Exchange of Thailand and SGX will launch the Asean Exchanges Link to enable brokers of the respective exchanges to help their customers trade securities of the other exchanges. The link is aimed at increasing intra-Asean (the Association of South-east Asian Nations) investments at a time of continued strong growth in the region.

The end-game for Asian exchanges is the same as that for their Western peers – to grow market participation and, ultimately, market volume and liquidity. International companies are increasingly looking to raise funds in Asia. This trend is expected to continue as companies look to not only tap Asian fund flows, but also to grow brand recognition and their footprint in the world’s fastest-growing region. At the same time, Asian investors also want to better manage their savings by diversifying investments beyond domestic markets.

Over the long term, I believe that these trends will translate to a greater concentration of financial market activities around a few centres – Tokyo for Japan, Hong Kong and Shanghai for China and Singapore for Asia as a whole.

Pole position

Singapore, which is in the heart of Asia, is ideally positioned to be the conduit for international companies seeking Asian capital and international investors coming to the region to access high-growth economies and companies. More than 40% of companies listed on SGX are non-Singaporian in origin and the proportion is expected to grow. Of these international companies, about half are from China while some of the others are from Asian countries including Indonesia, Malaysia and Thailand. Some 84 exchange-traded funds are listed on SGX, 90% of which are international ETFs, making the suite Asia’s most international.

Also traded on SGX are American Depositary Receipts of 27 international companies. Some of these, including Baidu.com and Ctrip.com, were previously unavailable to investors in the Asian timezone. SGX also has the world’s most comprehensive suite of liquid Asian equity index derivatives, including Nikkei225, FTSE China A50, India’s Nifty, MSCI Taiwan and Singapore MSCI futures.

For Singapore to continue to be a proxy for all of Asia, SGX has to continue to innovate and improve, as well as build and expand on collaborations and partnerships. Extended trading hours for key contracts of SGX’s derivatives market is likely. In July 2011, SGX expanded its long-time mutual offset agreement with the CME Group to include the Nifty futures, enabling round-the-clock trading of the contract. More metals contracts will be added in the months ahead to the three which SGX launched in partnership with the London Metal Exchange in February 2011. In the coming months, SGX's communication points-of-presence will be set up in international financial centres such as Chicago, London, New York and Tokyo. These will connect international liquidity pools more economically to SGX’s markets, thereby encouraging investment flows into Singapore. 

Exchanges all over the world are becoming more attractive, robust and competitive. Asian exchanges are no different. Operating where economies are growing at the fastest rates in the world, Asian exchanges are increasingly rolling out products and services for international investors. To remain internationally relevant, SGX will continue to future-proof its technology, products, services and employees, as it delivers Asia with global reach.

Magnus Bocker is the CEO of the Singapore Exchange

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