Published On: Sun, Aug 30th, 2009

Asias Exchanges Favour Shareholders Over Members

Recently, the premier bourses of Asia reported their financial results as is prudent for publicly listed companies. Not surprisingly they all reported a decline in revenue in “harsh conditions”. However, they were all profitable. Not only that but gross profit margins were in the mid 70% range akin to a growth company or more precisely a monopoly. What was telling about the financial results was the dividend payout ratio (the percentage of net after tax profit paid to shareholders in the form of a dividend) all stood at 90%. Asia’s exchanges clearly put their shareholders ahead of their Members. These are the very same members who supported them initially when these exchanges were just getting off the ground. Of course, members have been added over the years but the big bang of demutualization saw Members put on the back-shelf in favor of shareholders. Incidentally, dividends paid in Hong Kong and Singapore are tax free.

The lion’s share of revenue comes in the form of exchange fees and tariffs exacted from trades executed on
their respective bourses. In turn the members pass these fees on to their clients. “All in brokerage” is generally never quoted in Asia to leave the buy-side with the perception of a nominal commission. But when exchange fees are added costs of trading rise markedly. And don’t forget Exchanges are getting paid on each side of the trade as well.

Another part of stock exchange revenue comes in the form of clearing those trades. These exchange companies not only own the exchange but the post trade clearing as well. And of course the exchange data earns money too. It’s a very vertical industry to be in. Like Henry Ford who not only made cars but also the steel for the cars and the homes were the workers lived too.

Let’s take a look at some financials.

ASX Ltd (FY08/09)
Gross profit margin of 74%
Net Earnings per share $1.83
Dividend per share $1.65

HKEx Ltd (HY09)
Gross profit margin of 77%
Net Earnings per share $2.05
Dividend per share $1.84

SGX Ltd (FY08/09)
Gross profit margin of 77%
Net Earnings per share $0.29
Dividend per share $0.26
(All dollar values are quoted in local currency)

Mr Hsieh Fu Hua, Chief Executive Officer of SGX said: “Despite the market uncertainty, SGX remained profitable and our business, resilient. ” With margins like that my business would remain profitable and resilient too.

The brokerage business is competitive and Members must be on top of any changes that happen at the Exchange and change their business accordingly (at their own expense). For example, the HKEx introduced a Closing Auction session last year extending securities trading from 16:00 to 16:10 and futures trading from 16:10 to 16:30. Almost all the exchanges globally have a Closing Auction Session so the HKEx should have one too. Brokers rushed to develop algos, update their IT infrastructure, modified operations and extended business hours all for the elusive brokerage paid by its client. Only 6 months later the HKEx rescinded the Closing Auction Session March 23, 2009 citing market manipulation and volatility in a session that is supposed to bring an orderly close to daily trading. The industry was forced to roll back to the original closing time. Do you think the exchange reimbursed its Members for its poorly executed service enhancement? Neither do I.

Asia’s financial industry needs competition. It needs MIFID for Asia. Too much wealth is going to shareholders and not enough back to the industry and firms that helped their capital markets bring much needed investment to their inward looking fiefs. It’s this inwardness that the likes of Eurex, NYSE Euronext, Nasdaq/OMX and CME have had the opportunity to gobble up, consolidate and innovate the electronic trading industry globally. Once these exchange giants focus their energy and resources in Asia it will only be a matter of time before their national champions of prosperity are swallowed up.

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