Published On: Tue, Oct 26th, 2010

SGX and ASX Merger A Marriage of Survival

SGX and ASX Merger

The marriage of the Singapore Exchange (SGX) and the Australian Securities Exchange (ASX) has taken most by surprise. Exchange consolidation is a concept from the west where Europe and the US gobble one another up in a bid for global dominance. Granted, some of the western exchanges hold positions in Asian exchanges but are limited by ownership rules. We have seen some consolidation in Japan within the commodity space but never have we seen two Asia-based exchanges enter in to this kind of arrangement. I wonder if this move by the SGX to create "ASGX" is an act of survival or the first in a series of bold acquisitions as it sweeps across Asia to become a truly global financial player.

Let’s look at some statistics:

The equities market capitalization of both the ASX and SGX both in Asia and globally don’t really rank very high. Even the combined ASGX would rank behind Hong Kong in Asia and with it’s ties to the mainland it isn’t going anywhere and will continue to grow. Globally, the ASGX would rank behind the TSX Group in Toronto. Hardly a force to be reckoned with.

Exchange Market Cap (Million USD) Asia Rank Global Rank
ASX 1,157,870 6 11
SGX 551,451 10 21
ASGX 1,709,321 4 9
NYSE Euronext 11,925,525 NA 1
Tokyo SE 3,309,808 1 2
London SE 3,151,336 NA 3

* Data taken from the World Federation of Exchanges for month Aug 2010

If we look at the futures business for listed contracts (The SGX’s AsiaClear OTC platform is not included) the rankings are even less stellar. China leads the world now in certain commodity trading and India has hardly even started. We can argue ranking based on notional which would see Korea drop considerably but I just what to illustrate some of the rankings to get a sense of where SGX and ASX are placed in the regional and global scheme of things.

Exchange Contracts Traded Asia Rank Global Rank
ASX 51908734 12 21
SGX 29697982 13 26
ASGX 81606716 9 17
Korea Exchange 1781536153 1 1
CME Group 1571345534 NA 2
Eurex 1485540933 NA 3

* Data taken from the Futures Industry Association based on Jan – Jun 2010

Asia is known for its monopolistic exchanges and in recent months that landscape has changed dramatically (at least on paper) yet that hasn’t been reflected in reduced exchange fees (yet). Asia’s exchanges are notoriously expensive to trade not just at the brokerage level but the frictional costs deter professionals and arbitragers too. Here is a sample of the profit margins

Exchange Revenue (Mill USD) Profit (Mill USD) Profit Margin
ASX! 279.53 279.53 55.78%
SGX! 457.44 228.9 50.04%
ASGX 949 508.43 53.04%
HKEX* 887 579.97 65.37%
NYSE Euronext! 4,687 218 4.67%
CME Group* 814 271 33.29%
Nasdaq OMX* 3,280 157 4.79%

* Half year data annualized
! Full Year June 2010

You can see that the exchanges are squeezing the industry here in Asia. My next question is to ask will this merger further consolidate monopolistic pricing in the hands of a bigger exchange group (ASGX) or will competition finally be mandated which will see the cost to trade come down considerably. I would have to say the latter and this merger was in anticipation of the competition and to thwart the global giants that are lurking. Magnus Bocker the CEO of SGX is certainly no stranger to exchange consolidation having been involved with integrating seven northern European bourses into the OMX Nordic Exchange in his career.

One last set of data based on GDP

Country GDP (USD Mill) Rank
US 14,119,050 1
Japan 5,068,000 2
China 4,988,000 3
Hong Kong 210,570 39
Australia 994,246 13
Singapore 182,231 43

* Data taken from the International Monetary Fund

Its interesting to note that both Hong Kong and Singapore are hitting way above their size in Asia’s financial industry. Perhaps it is this leverage the Mr. Bocker hopes to bring to Australia and based on his track record this acquisition will only be the beginning. But an honest look at the statistics above it would be prudent to say that this is a merger of survival in a world populated by exchange giants and the threat of exchange competition looming in Asia.

Then again who is to say that this merger will actually occur. It still needs the nod of both the ASIC and MAS which initial indications seem to be favourable. There is also a 15% ownership rule in Australia that would have to be ratified by its Government and, of course, the approval of shareholders in Australia which would see their national champion fall into the hands of a foreign entity. I will be glad to see this marriage happen if it brings value to the industry and not just shareholder pockets. And if the ASGX does come to bare the question remains will this exchange group keep growing by acquisition or will it become the hunted and become a strategic meal on some giants plate?

 

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  1. carl gough says:

    thats a great post steve, puts it all into perspective – let it happen I say – try to encourgae more flow rather than restrict it .

  2. Trader says:

    The industry (sellside predominantly and buyside to a lesser extent ) has been crying out about the lack of liquidity in our market for a long time. If the consequence of this merger (and any other competitors entering the market) does anything to improve this it can’t be a bad thing. Having said this wecan’t have the government and it’s agencies allowing commercially competitive participants into the market then tie the ASX hands behind it’s back. The sellside have been their own worst enemies in encouraging buyside participants onto the electronic platforms, and the (hypothetically) improved volumes that this merger and the entry of new participants/exchanges may just save the hopelessly overbroked Aussie market. Come out of the dark ages and embrace globalization before we fall further behind. We’re a nation of prosperity but we need to be commercially savvy and not continue to ride on the coat tails of the mining industry.

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