Merger Could Threaten Hong Kong Exchange
Hong Kong's stock exchange has had a great run. The news from Singapore should be a warning sign that it can't take its good fortune for granted.
Singapore Exchange Ltd.'s US$8.2 billion takeover bid for ASX Ltd. is no sure thing. But if it goes through, the result could be a game-changer, creating a new center for trading in Asia with the liquidity to attract major investors and big companies alike.
The merger is in part a defensive move in the face of Hong Kong's relentless success. Hong Kong Exchanges & Clearing Ltd., known as HKEx, has attracted the world's biggest initial public offerings this year, and looks on target to finish up 2010 as the world's top exchange for funds raised through IPOs for the second year running. Its listed market value is greater than any other exchange in the world.
It has China to thank for that. Hong Kong depends on the mainland as the source for most of its share offerings, including the Agricultural Bank of China Ltd. IPO that made history this past July as the world's biggest ever. Of the US$22.1 billion AgBank raised, US$12 billion was in Hong Kong.
China is indirectly bringing listings to Hong Kong as well. Companies from Russia, France and Mongolia that raised cash on the Hong Kong exchange this year did so because of their ability to sell themselves as proxies for China's economic growth.
Singapore alone lacks Hong Kong's mainland Chinese hinterland. But a combined Singaporean and Australian exchange—call it SAX—does create a new attraction that could make up for it.
Liquidity is one area where this shines through. The two exchanges together accounted for about US$6.7 billion in average daily trading volume last month, within striking distance of the US$9.49 billion that Hong Kong generated. Big investors like liquidity, and so do companies looking to raise funds. You might not attract an AgBank to list on SAX, but one analyst said you might attract a company like pan-Asian life insurer AIA Group Ltd., the Asian arm of American International Group Ltd. that just raised US$17.8 billion on HKEx.
An exchange that opened at 9 a.m. in Sydney and closed 11 hours later at 5 p.m. in Singapore would also look fairly attractive compared to Hong Kong's four-hour trading day. Even an effort by HKEx to extend trading to 5½ hours is meeting resistance from traders loath to part with their customary two-hour lunches.
SGX has already been more aggressive than HKEx when it comes to embracing new technologies such as dark pools and high-frequency trading. After an expected upgrade to its systems next year, Hong Kong's latency—the time it takes to executive a trade—will still be about nine milliseconds. By next year, SGX will offer trading about 100 times faster than that, according to J.P. Morgan. And it has joined forces with Chi-X Group Ltd. to run a dark pool that allows investors to trade large blocks of shares anonymously, even as dark pools have been slow to gain traction in Hong Kong. (HKEx executives say other factors apart from latency, including government duties on trades and minimum trade sizes, make high-frequency trading less appealing in Hong Kong.)
HKEx's new chief executive, Charles Li, is pushing innovation on one front, in new products linked to offshore trading of China's currency, the yuan. One of his projects is to create yuan-denominated stock listings in Hong Kong as soon as next year that would capitalize on enthusiasm among global investors for the yuan's long-term prospects.
However, demand for the shares, whose value would be determined more by their underlying assets than the currency in which they are traded, remains an unknown.
Hong Kong is also trying to attract more resource-related listings by revising its listing rules in ways that allow mining companies to list more easily than in the past. But a SAX that incorporates trading in Australia's many commodity companies would boast a critical mass in resource plays that would make it a go-to exchange for other listings in the sector, depriving Hong Kong of a profitable new source of business.
Hong Kong may not be in danger of losing its position as the main entry for foreign stock investors into the China market. But if it isn't careful, a nimbler competitor in Singapore may soon make that position less profitable.
Write to Peter Stein at peter.stein@wsj.com
Singapore Exchange Ltd.'s US$8.2 billion takeover bid for ASX Ltd. is no sure thing. But if it goes through, the result could be a game-changer, creating a new center for trading in Asia with the liquidity to attract major investors and big companies alike.
The merger is in part a defensive move in the face of Hong Kong's relentless success. Hong Kong Exchanges & Clearing Ltd., known as HKEx, has attracted the world's biggest initial public offerings this year, and looks on target to finish up 2010 as the world's top exchange for funds raised through IPOs for the second year running. Its listed market value is greater than any other exchange in the world.
It has China to thank for that. Hong Kong depends on the mainland as the source for most of its share offerings, including the Agricultural Bank of China Ltd. IPO that made history this past July as the world's biggest ever. Of the US$22.1 billion AgBank raised, US$12 billion was in Hong Kong.
China is indirectly bringing listings to Hong Kong as well. Companies from Russia, France and Mongolia that raised cash on the Hong Kong exchange this year did so because of their ability to sell themselves as proxies for China's economic growth.
Singapore alone lacks Hong Kong's mainland Chinese hinterland. But a combined Singaporean and Australian exchange—call it SAX—does create a new attraction that could make up for it.
Liquidity is one area where this shines through. The two exchanges together accounted for about US$6.7 billion in average daily trading volume last month, within striking distance of the US$9.49 billion that Hong Kong generated. Big investors like liquidity, and so do companies looking to raise funds. You might not attract an AgBank to list on SAX, but one analyst said you might attract a company like pan-Asian life insurer AIA Group Ltd., the Asian arm of American International Group Ltd. that just raised US$17.8 billion on HKEx.
An exchange that opened at 9 a.m. in Sydney and closed 11 hours later at 5 p.m. in Singapore would also look fairly attractive compared to Hong Kong's four-hour trading day. Even an effort by HKEx to extend trading to 5½ hours is meeting resistance from traders loath to part with their customary two-hour lunches.
SGX has already been more aggressive than HKEx when it comes to embracing new technologies such as dark pools and high-frequency trading. After an expected upgrade to its systems next year, Hong Kong's latency—the time it takes to executive a trade—will still be about nine milliseconds. By next year, SGX will offer trading about 100 times faster than that, according to J.P. Morgan. And it has joined forces with Chi-X Group Ltd. to run a dark pool that allows investors to trade large blocks of shares anonymously, even as dark pools have been slow to gain traction in Hong Kong. (HKEx executives say other factors apart from latency, including government duties on trades and minimum trade sizes, make high-frequency trading less appealing in Hong Kong.)
HKEx's new chief executive, Charles Li, is pushing innovation on one front, in new products linked to offshore trading of China's currency, the yuan. One of his projects is to create yuan-denominated stock listings in Hong Kong as soon as next year that would capitalize on enthusiasm among global investors for the yuan's long-term prospects.
However, demand for the shares, whose value would be determined more by their underlying assets than the currency in which they are traded, remains an unknown.
Hong Kong is also trying to attract more resource-related listings by revising its listing rules in ways that allow mining companies to list more easily than in the past. But a SAX that incorporates trading in Australia's many commodity companies would boast a critical mass in resource plays that would make it a go-to exchange for other listings in the sector, depriving Hong Kong of a profitable new source of business.
Hong Kong may not be in danger of losing its position as the main entry for foreign stock investors into the China market. But if it isn't careful, a nimbler competitor in Singapore may soon make that position less profitable.
Write to Peter Stein at peter.stein@wsj.com
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