A recent flurry of announcements has revealed the deep extent to which Asia's financial markets are being transformed. First, Chinese officials said they were looking at consolidating all the country's stock markets under one exchange. Yesterday, Hong Kong Exchanges and Clearing began trials of a new system, AMS3, that takes the broker out of stock trading. And, on the same day, the Singapore Exchange and the Australian Stock Exchange unveiled plans to form a link so that traders in Australia can directly buy and sell Singapore stocks and Singapore traders can directly buy and sell Australian stocks.
These three announcements come hot on the heels of other developments that are changing the way stock markets around the region and the world are being organized. There are now seven Nasdaq stocks trading on the Hong Kong Stock Exchange and all of Europe's stock exchanges are in the full flush of merger fever. A delightful story has even come out of Vietnam.
The preparations for Vietnam's new stock exchange have not been going smoothly since it was announced in 1994. But officials have set a final deadline of July this year for the exchange - called the Stock Transactions Centre - to be up and running. The latest delay was caused by software problems. Apparently the software to run the exchange, which was imported from Thailand, did not comply with the Vietnamese stock market regulations. But rather than risk a further delay by altering the software, Vietnamese officials simply changed the regulations. A case of the tail wagging the dog.
The point of all this is to wonder whether the region's exchanges are being blinded by opportunities. In the headlong rush to attract new issuers and increase trading volumes, corners are being cut. Witness the furore over the waivers being handed out willy-nilly by Hong Kong' second board, the Growth Enterprise Market - an example of investors' interests coming a poor second to the exchange's profit.
Rectitude before revenues
The globalization of the international capital markets means that good companies can issue their stocks anywhere, and investors can invest with increasing freedom anywhere they choose. This has put pressure on exchanges to create the most conducive environment for new issues and large volume trading. Added competition from new electronic communications networks (ECNs), such as Instinet and Tradebook, is threatening to take even more revenue from the exchanges. With all these pressures it is natural that the bourses are starting to react.
The fundamental problem lies in the fact that these exchanges are often in charge of the regulation of the market while at the same time being profit-making organizations. These two roles are mutually exclusive, as good regulations are usually inhibitive to trading, and so would have a negative impact on profits. Investors' interests are best served by a non-profit-making body that can objectively make rules and decisions without worrying about the returns. And despite the obvious opportunities thrown up by technology and globalization, exchanges should not forget that they are there to provide a service to issuers and investors, not to rack up vast earnings.
