Singapore and Australian exchanges: learning to play the SAX?

Price and protectionism aside, the acquisition proposal between the Australian and Singapore exchanges is a potential winning stroke for both countries.

While Australian nationalism (read protectionism) may force politicians to veto the deal, the Singapore exchange (SGX) had to try something to force its way back onto the international stage. Granted the price being paid by Singapore might be a tad too much but it might just be a price worth paying.

The Singapore exchange had all but lost the regional race to Hong Kong some years ago. Hong Kong basks in the sunshine of being a political territory of the fastest growing economy in the world – the People's Republic of China!*

Recently, the financial race has added a new dimension, a shift from the capital markets to the currency markets. Offshore Yuan trading will be the next big thing. Once a freely tradable / convertible Yuan becomes established, then Yuan based tradable securities are merely a hop, skip and jump away.

Yuan denominated transactions, fixed income, equities and derivatives, will happen first and foremost in Hong Kong. Singapore may get some crumbs but Hong Kong will win the prize ... again.  

Hong Kong's natural advantage, geographically and politically will practically ensure the city the right of first refusal for most major future transactions (which will be liberally sprinkled with Chinese government owned entities).

Australia faces other issues. The country's geographic isolation is its best friend and enemy.

Australia is the first major capital market traders can access. It's a natural stop for businesses from Oceania. The capital markets benefit from a steady supply of resource linked companies. The Australian institutional investment community familiarity with resource based companies is an added advantage.

Yet, for companies beyond a certain size Australia loses much of its relevance. Also, after a certain time trading shifts to Europe and the US. In a sense, Australia is an important market by default – its importance diminishes as the rest of the world wakes up.

Put two 'losers' together and one may just get a bigger loser. But the stakes for the SGX and the Australian exchange (ASX) are high. A merger gamble is better than sitting around waiting for the situation to improve.

There are ways in which a 'joint' exchange can synergize a winner. Imagine if stocks were dual listed on both the ASX and the SGX, meaning investors had two time zones to trade the same security. The resultant liquidity boost may just galvanize more listings on a merged SAX, exactly the medicine required to revive the SGX.

Operational constraints are real, including managing pricing in two floating currencies. Related settlement matters will also need to be addressed. However, over time such teething issues can be overcome with adequate investment.

Many observers question the wisdom of the SGX bid for the ASX. The strategy does raise legitimate questions about the SGX's future strategic direction. Nevertheless, without a radical departure from the past the SGX would only continue its slow march into the sunset.

Sometimes, shaking things up is a prudent strategy – even if the end result is unknown. It stirs corporate entities from a complacent slumber.

* I wrote a post titled 'Has Singapore lost the race to Hong Kong' in October 2009.