Singapore and Sydney pose threat to HKEx

PUBLISHED : Saturday, 23 October, 2010, 12:00am
UPDATED : Saturday, 23 October, 2010, 12:00am

The Hong Kong stock exchange faces a potential challenger for regional listings following reports that the Singapore and Sydney stock markets are in merger talks to create a giant pan-Asian bourse.

The Singapore and Sydney exchange operators, both listed in their own markets, had their shares suspended from trading yesterday after local media reports said the two were in talks about a potential-tie up. The exchanges declined to comment.

Sydney's bourse told the Australian market regulator it was suspending shares for two days because 'a party has recently reactivated confidential discussions concerning a possible business combination'. Singapore may make a takeover bid for the Sydney exchange on Monday, The Australian newspaper reported on its website yesterday.

A merger would mean the combined exchanges edging closer to Hong Kong in terms of world ranking. It would create a bourse with a market capitalisation of US$1.7 trillion, bigger than Mumbai and Brazil's Bovespa but below Toronto and Hong Kong.

Hong Kong is the world's seventh-largest, with a US$2.3 trillion market capitalisation, while Sydney is ranked 11th largest with US$1.15 trillion. Singapore comes in 21st with US$551 billion, according to the World Federation of Exchanges.

The potential merger comes at a time when independent electronic trading platforms are eroding the business of traditional exchanges around the world. In Hong Kong and across Asia there are more than a dozen of so-called 'dark pool' operators allowing traders to use electronic platforms to carry out trades without disclosing their identity, volume and price. These are getting increasingly popular with institutional investors.

Many overseas exchanges have been forced to merge in order to compete with new technologies. New York Stock Exchanges merged with Euronext in 2006 to enhance competitiveness.

Hong Kong and some Asian exchanges are protected by regulations that require all dark-pool operators to link to members of traditional exchanges.

The potential merger with Sydney is the latest effort by the Singapore exchange to compete in the international arena. It will launch Asia's first exchange-backed dark pool by teaming up with Chi-X Global next month to trade shares in Hong Kong, Australia, Singapore and Japan. Chi-X, a unit of Nomura, is a global provider of market technologies and trading venues and one of the biggest dark pool operators in Europe.

Singapore Exchange yesterday also announced a plan to extend co-operation with Nasdaq to allow cross listing in both markets to give investors more choice.

Chi-X Global will also expand in Australia, where it has already won preliminary approval to become a competitor to the Sydney exchange. It hopes to start operations by March.

A spokesman for Hong Kong Exchanges and Clearing (HKEx) declined to comment on the possible Singapore-Sydney deal but said it was always open-minded about 'possible alliances that would benefit its China focus strategy'.

A Hong Kong exchange director, who did not want to be named, said the bourse did not really have much interest in merging with a competitor. 'Each entity serves a different clientele and has a vastly different regulatory regime,' he said. 'I am not sure how Singapore and Australia can benefit each other either. As we have seen, many other merged exchanges, such as New York Stock Exchange and Euronext, are run very much like two separate markets, so what is the real benefit of a merger?'

The director said Hong Kong had to compete with other big exchanges so a combined entity would be a more potent competitor. 'But even if the merger went ahead, the combined one is never going to be part of China like Hong Kong, so the ultimate difference and unique position for Hong Kong is hard to beat for a very long time.'

Institutional investors believe the merger would be a good move.

'It will facilitate stronger links for investors at both locations to trade more easily. However, I see little impact on Hong Kong as our focus has been with China,' said Rex Auyeung Pak-kuen, president of Principal Financial Group's Asia region.

'Hong Kong is strong enough to compete on a global basis. Obviously joining hands with other large stock exchange like Shanghai or New York will further enhance our global positioning, but one has to review what do we have to give up,' Auyeung said.

Hugh Young, the Singapore-based managing director of Aberdeen Asset Management's Asian business, said a merger would allow the traders in each country access to a wider range of stocks. It could also help them save head office and other administrative costs. He said Asian exchanges needed to think about consolidation because dark pools were becoming popular. Citi, for example, offers clients a dark-pool trading service in Australia and is setting one up in Singapore.

Closing the gap

World ranking of stock exchanges based on total market capitalisation at end of August (US$trillion)

1 New York: 11.9

2 Tokyo: 3.3

3 Nasdaq: 3

4 London: 2.6

5 Euronext: 2.41

6 Shanghai: 2.4

7 Hong Kong: 2.3

8 Toronto: 1.7

9 Mumbai: 1.4

10 Brazil: 1.3

11 Sydney: 1.15

21 Singapore: 0.55

A Singapore - Sydney merger would claim 9th place