Here is my piece from the AFR today on the SGX bid for the ASX.
It is jarring for many Australians to hear that the Australian Securities Exchange (ASX) may be merged into a foreign suitor. It seems like only yesterday that there was a stock exchange in every state capital in Australia. Only in 1987 were Australia’s provincial share markets consolidated into the Australian Stock Exchange in Sydney.
There has long been a view on Collins Street that John Cain’s Victorian Government made a crucial error when it allowed the Melbourne Stock Exchange to shut and all share trading to move to Sydney in 1987. Those critics mark the day of the decision to shut the Melbourne Stock Exchange as the day that Sydney became the financial capital of Australia. When foreign investment banks and wealth management firms came to Australia in the late 1980s and through the 1990s, they set up in Sydney to be near the stock exchange.
Some critics of the Singaporean Exchange Limited (SGX) bid for the Australian Securities Exchange believe that if the bid is approved then Julia Gillard’s Federal Government will be repeating John Cain’s mistake at a national level. Singapore would be confirmed in the status of the number two financial centre in the region behind Hong Kong. Australia would be consigned forever to a bit part in regional finance. I don’t subscribe to that view because I think it is very unlikely that the ASX will be an independent entity in ten years time whatever the future holds.
The experience of the Australian stock markets in the last 25 years, and in the decade to come, should be understood as an expression of a global process that has three steps. The first step is consolidation of provincial exchanges into national exchanges; the second is demutualisation of the national exchanges to create listed exchanges; and the third is the merger of those listed exchanges across national boundaries.
Australia is two steps into this process. The US is well into the third stage. Consolidation of provincial US stock exchanges took place in the 1950s. Until the 1950s there were vibrant stock exchanges in San Francisco, Chicago, Atlanta, Boston, Philadelphia and many other cities. Then as communications technology improved in the following decades trading became concentrated on the NYSE and Nasdaq bourses in New York.
Nasdaq became a listed company in 2002 and the NYSE followed in 2006. In 2008 Nasdaq acquired a group of nine stock exchanges of Baltic countries, including Sweden, Denmark and Finland, called OMX. In 2007 the NYSE merged with another consolidated group of European stock markets called Euronext, which included the stock markets of France, Holland and Portugal. Nasdaq and the NYSE have not consolidated all of the exchanges that they now own into single platforms which list all the shares side by side, but single platforms are not far off.
Once the ASX took the second step of demutualising and becoming a listed company, the third step of a merger with a global exchanges company was sure to follow. We should really be surprised that a bid for the ASX did not arrived sooner because the Australian Stock Exchange was first listed way back in October 1998.
SGX may be blocked from taking over the ASX, but there is no doubt that the ASX is now in play and will end up in the hands of one of the major exchange groups. This third step for the ASX is part of an unstoppable global process of consolidation.
Consolidation of small financial markets into large markets is a natural and age old process. Each buyer wants to face as many prospective sellers as possible and vice versa. Multiple local markets can survive when transport and communication costs of traders coming together exceed the gains from extra liquidity. But as communications improve over time the markets for financial instruments of all kinds – stocks, bonds, derivatives – have consolidated.
Like all technology driven processes the path forward for global consolidation of stock exchanges is very unclear and will have many steps. To respond to the SGX bid the Federal Government must look forward and reason backwards.
The Government should accept the inevitability of the Australian Stock Market being merged into one of just a handful of competing global exchanges. The Government does not need to arrange a marriage for the ASX to a preferred global exchange. As long as the ASX joins a group that is run on commercial grounds, is regulated to Australian standards and is free of the interference of national governments then the process can manage itself.
The question for the Government is whether a merger with SGX is a first step in that direction? The Australian Government may not feel the need to manage the process of the ASX merging into a global exchange. But the Singaporean Government surely will want to manage that that process, and without reference to Australian interests.
Allowing the SGX bid to proceed would not be the Australian Government opting for no Government interference in the path of the ASX into a global exchange. It would be passing control of the process to the Singaporean Government.