SGX bets on innovation to catch up

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HONG KONG (Dow Jones Investment Banker) – Singapore Exchange Ltd (SGX), dwarfed by a number of its Asian rivals, is sparing no efforts to compete on a regional stage. But its introduction of remote trading is likely to have only a marginal impact.

This week’s announcement of a proposal to allow foreign brokers to trade on the SGX while still observing their home rules, although only for non-Singapore investors, is the latest in a series of moves aimed at boosting the attractiveness of its platform to issuers, underwriters and market participants.

(Click here for SGX announcement)

Judging by the recent experience of the Tokyo Stock Exchange, however, which took years to admit its first and so far only remote trading participant, G.H. Financials from London in September, this move should have only a marginal impact on the SGX’s standing. Nor should it change the parameters of its proposed merger with the Australian Securities Exchange, ASX Ltd.

In terms of market capitalization, the SGX ranked as 21st stock exchange in the world at $0.55 trillion as of August 2010, according to the World Federation of Exchanges. That places it far behind regional rivals Tokyo, Shanghai, Hong Kong–and even Sydney, which, in 11th position, boasts more than twice the SGX’s capitalization.

Crucially, in terms of securities markets turnover, the SGX’s US$1.55 billion daily average achieved last November also pales in comparison with Hong Kong’s US$12.6 billion.

And in the primary markets, Singapore is still a minnow, even though the execution process there is more user-friendly than on other Asian exchanges. The largest IPOs in Singapore were the US$2.75 billion and US$2.05 billion issues by Global Logistics Properties and CapitaMalls Asia in 2010 and 2009 respectively, the previous record being held by SingTel back in 1993. Hong Kong, by contrast, had three IPOs above that amount in 2010 alone, including one at US$20.4 billion by AIA Group Ltd and one at US$12 billion by Agricultural Bank of China Ltd.

– Low volumes –

The SGX’s comparatively low trading volumes (and related lower valuations) have also led several corporates to seek listings in Hong Kong over the last couple of years, including Taiwanese rice cracker manufacturer Want Want, as well as China’s Sihuan Pharmaceutical and steel and coal trader Novo Group.

Despite its shortcomings, however, the SGX has shown a remarkable capacity to innovate, hardly matched by any of its regional peers.

While Hong Kong has remained focused on Chinese issuers, and only started to allow listings by foreign corporates in early 2010, the SGX has over the years listed more than 200 international companies from more than 20 countries, which now account for more than 30% of all equity listings. And excluding Japan and Australia, the SGX is widely regarded as the premier market for REITs in the region, with 23 listed funds and 54 follow-on capital raisings since 2002.

– Fastest platform –

The SGX’s trading systems are also superior. According to research by Celent/Oliver Wyman, the SGX already has one of the fastest exchange matching systems in Asia, allowing for trades to be executed at up to under 1 millisecond, compared with Hong Kong’s 10 to 15 seconds. A new US$250 million upgrade, which should become operational in the first quarter of 2011, will make the SGX the world’s fastest.

Other recent initiatives have shown much wit. In September 2010, the SGX established a platform in partnership with NASDAQ OMX Group Inc. for the trading of U.S.-listed Asian ADRs in the Asian time zone. Some 19 are now traded in Singapore, in addition to seven GDRs listed there by Indian issuers. Hong Kong had to wait for more than two years to list a single HDR, in December 2010.

– Merger –

The SGX’s proposed US$8.4 billion merger with the ASX, another platform that has historically demonstrated much innovation, has already cleared one of several regulatory hurdles. Should it go ahead, it would propel the new platform to 9th place globally, ahead of Mumbai, and would ultimately offer investors and issuers in both markets more choice.

The jury is still out, however, on whether the combined entity will have enough resources and muscle to finally drive up those all-important trading volumes and challenge both the larger exchanges and an increasing number of dark-pool operators around the world.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected].)

[This article was originally published on Dow Jones Investment Banker on 30 December 2010 and is reproduced with permission]

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