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SCMP Reporter

You might think a savage financial crisis and two years of recession would dampen Asian governments' enthusiasm for more globalisation.

 After all, it was an immodest openness to free-flowing capital that helped to blow up financial bubbles that wrecked the region's economic dreams.

 Maybe so, but when it comes to trading stock, the impact of a networked world is forcing exchanges both to modernise and to rethink notions of national interest.

 Hong Kong is soon to demutualise its member-owned exchange and, this week, proposals for a link with the Singapore bourse have been put forward.

 The idea that exchanges have more to gain by linking trading networks is not new.

 Many are now connected to markets in different time zones, allowing after-hours trading on stocks that would be otherwise inaccessible to many investors.

 More radical are directly competing exchanges in the same time zone promoting a unity of purpose.

 Driving this change is the growth of electronic communication networks (ECNs), where brokers bypass exchange-dealing systems and simply trade using linked computer systems.

  To date, such off-exchange trading of equities has occurred mainly in the United States, but demands for tighter pricing and low-cost commissions mean exchanges in Europe and Asia are scrambling to form alliances.

 Against this backdrop, the Asia-Pacific market that has gone furthest along the modernisation route is the one that first threw off the shackles of private ownership.

 The Australian Stock Exchange (ASX) went public a year ago and according to its chief executive, Richard Humphry, has not looked back.

 Since listing, the ASX share price has more than doubled, as a powerful consumer boom, popular privatisations and a rediscovered enterprise culture have ensured huge retail interest in the stock market.

 Australia now has the world's highest rate of share ownership which, combined with the region's most transparent and efficient capital markets, has made it a case study for reformers like Hong Kong.

 In the next few weeks, the new chief executive of the soon-to-be merged Hong Kong stock and futures exchanges, Alec Tsui Yiu-wa, will visit Sydney on a fact-finding tour.

 What he will find, according to Mr Humphry, is an exchange almost unrecognisable from the one dominated by narrowly focused member interests.

 'You don't realise how profound the difference is until you are in a different environment,' Mr Humphry said.

 'It is only after the event that we really appreciate the full cultural transformation we have gone through.

 'Before, there was a habit of developing rules and governance arrangements without reference to the industry.'  The difference today? 'Now we have discovered that we have customers,' Mr Humphry said.

 In recent years, the idea that the Stock Exchange of Hong Kong had 'customers' hardly resonated, considering the unabashed promotion of its members' interests.

 The same shoe-gazing myopia apparently characterised the ASX.

 'Previously, all members were treated equally. Now policy is decided with reference to major market participants rather than just a small but powerful lobby,' Mr Humphry said.

 In Hong Kong, the Sydney experience has been cited widely by pro-merger proponents as an example of how broker members can benefit in the expanded profitability and presumable share-price appreciation of the publicly listed exchange.

 But unlike Sydney, local brokers have won a grace period before full competition comes in the form of fully negotiable commissions.

 Before then, ever more avenues to trade can only increase rebating for almost all sizeable transactions before the commission rules formally change.

 Mr Humphry would like to be part of that competitive process, by offering listing opportunities for Hong Kong blue chips in Sydney.

 'Trading in Hong Kong stocks would be especially powerful if we could do it in the same time zone that the primary market is trading,' he said.

 Accepting that Australian institutions have not displayed previously an appetite to trade Asian stocks in the domestic market, his argument is that only by a trial and error process of joining markets is it possible to see where investing demand lies.

 'It is in everybody's interest to deepen the avenues for the process of price discovery to take place.

 'This is not a matter of one exchange grabbing business from another.'   Australia has an ageing population with an expanding appetite for share ownership but only a finite pool of local investment possibilities.

  As such, encouraging firms from the United States or Asia that are unable to get exposure in their own market has been a key plank in the ASX's efforts to increase listings and deepen trading activity.

 Where this process of change is going to end is unclear.

 Domestic regulation, differing standards of corporate governance and pure national interest suggest full cross-border mergers of exchanges is unlikely.

 The collapse of talks between the Frankfurt and London exchanges, despite similar threats from ECNs, shows the difficulty of putting the utilitarian notion of mergers benefiting all into practice.

 Mr Humphry envisages a loose federation of Asian exchanges joined by trading links, but maintaining distinct ownership and regulatory regimes.

 While the ASX has had exploratory talks with the Singapore International Monetary Exchange, no deal is imminent.

 Given the apparent economic detente between the SAR and Singapore, he will no doubt bend the ear of Mr Tsui to stick with a multilateral view of Asian markets.

 But on one front, at least, it will be Mr Tsui who will be offering his hosts a view of the future.

 Recently, Australia's competition regulator ruled against the proposed merger of the ASX and Sydney Futures Exchange on the grounds of monopoly power.

 'This is a matter of huge frustration to me. I can't tell you how fortunate you are to have a regulator that has allowed the merger to be completed so quickly,' he said.



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