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SCMP Reporter

On October 24, 1994, Australia's stockbroking profession came perilously close to killing off the goose which is now just about to lay the golden egg.

 A resolution that individual brokers give up their membership of the Australian Stock Exchange (ASX) in return for a A$25,000 (about HK$119,305) payment was only narrowly defeated - 69 per cent supported the resolution but a 75 per cent majority was required.

 Four years later the brokers are set to swap their memberships for shares which will probably be worth at least $500,000 when the ASX lists its shares on its own bourse on October 14.

 The ASX will become the first publicly traded, broker-owned stock exchange by issuing 166,000 shares to each of its 606 former members, 520 of whom are individuals.

 The only existing avenue for investing in a stock exchange is via Stockholm-listed OM Gruppen, a derivatives exchange operator which acquired the Stockholm Stock Exchange earlier this year.

 For more than a century the ASX has operated as a mutual organisation of stockbrokers who had sole right of access to the market.

 But things changed in 1982 when the then Trade Practices Commission ruled that the ASX was obliged to admit corporations as members.

 Inevitably the corporations - there are currently 86 broking firms - came to dominate trading and now handle 99 per cent of all equity transactions.

 But this created an anomalous situation which eventually had to be remedied. While the firms may account for 99 per cent of ASX share transactions they had less than 20 per cent of the votes under the ASX's mutual structure.

 This meant that individual members, many of whom are semi-retired or inactive, effectively controlled ASX decision-making.

 If the ASX remained a mutual it would have been obliged to focus primarily on the interests of these individual members, many of whom may not care about the ASX remaining internationally competitive if this meant extra costs or longer working hours for them.

 But as a public company ASX's board will speed decision-making in the face of growing competition.

 ASX managing director Richard Humphry said the ASX's restructuring 'is a strategic move to meet the competitive challenges of domestic and international capital markets'.

 The move is the latest in a series of stock exchange demutualisations occurring around the world.

 The Milan bourse demutualised last year via a private placement of shares. A 38 per cent stake in the Athens Stock Exchange was also sold late last year and the Greek Government is planning to list the Athens bourse.

 The Stock Exchange of Singapore is also considering demutualising.

 Exchanges can no longer afford to be a 'broker clubs' if they hope to provide the most efficient and cheapest services to their other customers such as listed companies, institutional investors and information vendors.

 By separating ownership of the exchange from access to the exchange groups such as financial planners and accountants who can satisfy certain standards will be able to be hooked up to the ASX's market.

 This increased competition should lead to lower transaction costs for investors wanting to buy and sell shares.

 The most immediate threat to the ASX - the world's 13th largest bourse - is that giant foreign exchanges such as the New York Stock Exchange (NYSE) and London Stock Exchange will steal some of its larger market capitalisation stocks.

 For example, Australian group James Hardie Industries intends to inject its assets into a new company which it wants to list on the NYSE.

 The Australian Government is also considering a unified regulatory regime for its securities and futures markets which could lead to more direct and broader-based competition between the ASX and the Sydney Futures Exchange.

 Observers estimate shares in the ASX will begin trading at between $3.00 and $3.50, valuing each member's holding at roughly $500,000 to $600,000.

 The 'guesstimates' are based on ASX's projected net profit for the year to June of $17.8 million and its cash pile of $170 million. But no price for the shares has been set.

 Mr Humphry's fear is some investors may get their fingers burnt if the company's shares initially spike to unrealistic levels due to lack of supply but then later start sliding.



Publicly traded ASX latest in demutualisations around globe