Source: The Wall Street Journal Asia                  Date: 01 November, 2010

For a brief, happy moment earlier this week it looked like Asian bourses were in for a desperately needed shake-up. Singapore Exchange (SGX) unveiled an USD8.3-billion bid for ASX, operator of Sydney's stock market. Talk inevitably turned to prospects for consolidation elsewhere. Everyone spoke too soon. The SGX-ASX deal already is facing stiff political resistance and mounting skepticism over whether it will go through. Analysts (and journalists) are waking up to the reality that other Asian mergers would face dim prospects, too. Yet rather than merely take that pessimism as a given, it's important to pinpoint exactly why exchange consolidation remains so far off.

A wave of exchange mergers should by rights be the big Asian story of the day. The tide is sweeping the West, both domestically (a tie-up between the Chicago Mercantile Exchange and Chicago Board of Trade in the U.S., for instance) and internationally (NYSE and Euronext; Nasdaq and OMX; Deutsche Boerse and International Securities Exchange). True, these mergers have delivered somewhat less than some might have hoped. The dream of creating a single exchange across the Atlantic—where one can start trading shares in, say, a Dutch company at 9 a.m. in Paris and finish 13 hours later at 4 p.m. in New York—has proven elusive. Global bourses still are hostage to local regulators, so the theoretical big pools of capital these mergers have dangled in front of listing companies and traders have turned out to be just as fragmented as before, in practice.

But that doesn't mean the exercise is pointless. The merged bourses claim some success trimming costs, although savings are limited by the fixed costs of adhering to local regulations. More significantly, merged bourses are becoming more inventive at generating revenue in a world where online trading platforms of many sorts are biting into their traditional business of offering a venue for trading financial instruments. NYSE Euronext, for instance, is increasing its revenues by selling technology to other, smaller exchanges.

Put another way, what is unfolding in the West is not a trend toward consolidation per se, but rather the development of a vibrant market in exchange ownership. This includes Western exchanges that are not consolidating. The London Stock Exchange has remained aloof despite attempts to buy it. So have others, such as the Chicago Board Options Exchange. "I look at it and I say, 'Is it bigness that's the answer, or is it growth that's the answer?'," CEO William Brodsky told Reuters in July. "I'd rather have growth than just bigness for the sake of it." Investors will have ample opportunity to judge whether he and others are right about that.

Not so in Asia, however. As a region that is experiencing massive capital inflows, and has enormous economic growth potential, Asia ought to be the epicenter of innovation and competition among bourses trying to direct capital most efficiently to those who need it. Instead, the region has seen a few half-hearted attempts at "cooperation" among various exchanges and little else.

The facile explanation for this is that Asian governments view their stock exchanges as national treasures that cannot be allowed to fall into the hands of foreigners. ASX labors under a regulatory 15% cap on foreign ownership, for instance. Conventional wisdom holds that a foreign takeover attempt of almost any Asian bourse would die a political death. But NYSE-Euronext faced political challenges, too—Jacques Chirac, for one, thought the Parisian exchange should have merged with the Frankfurt bourse. That deal went ahead. Something more than nationalism is at work in Asia.

The real explanation is that many Asian governments still have not made their peace with global capital flows. This is most obvious, surprisingly enough, in those markets that are most developed: Singapore, Australia and Hong Kong.

Politicians in Canberra worry that a foreign owner could disadvantage the Sydney market by, perhaps, encouraging more companies to list in Singapore than in Australia. Hong Kong's government believes the territory's exchange is too important to be left in anyone else's hands, and so it retains for itself the right to appoint half the board. The Monetary Authority of Singapore owns nearly 25% of SGX, though it doesn't vote those shares.

In effect, policy makers don't trust global capital markets to fund successful companies in a healthy economy (Australia); or to recognize the rule-of-law and other benefits of setting up financial shop in the world's two freest economies (Hong Kong and Singapore). In the face of such distrust, excited talk of bourse consolidation is premature.

This governmental reluctance to set exchanges free is a problem that will grow more serious with time. Aside from consolidation, Asian exchanges face critical questions. To rely on China or to diversify efforts to attract IPOs further afield? To compete against or to embrace new electronic platforms and so-called black pools of secretive hedge-fund money? And on and on. A vibrant market for ownership could spur more creative thinking in the face of such challenges.