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It is an interesting development that Australians are making an
argument and perhaps it is to press for more control.

Treasurer should ban ASX takeover
Peter Swan From:The Australian January 04, 2011 12:00AM
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WILL Treasurer Wayne Swan reject the ASX-SGX acquisition by Singapore
the way Peter Costello rejected Shell's acquisition of Woodside on
grounds of national interest? He should.

The act gives virtually complete discretion to the Treasurer and
Foreign Investment Review Board: "The government determines what is
'contrary to the national interest' by having regard to the widely
held community concerns of Australians."

A poll conducted by UMR showed most Australians of all political
persuasions were opposed to the acquisition.

Although the FIRB rejects only a negligible number of applications, it
is more common for applications to be withdrawn, perhaps because
unacceptable changes are required.

Clearly, the ASX is concerned. It has commissioned a report from
Access Economics "for ASX Limited". Thus, significantly, Access
Economics does not position itself as giving an "independent" report.


RELATED COVERAGE
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The Australian, 15 Dec 2010

The main argument put forward is that the link will develop Australia
as a regional financial hub by lowering the cost of capital "through
increased scale, liquidity and diversification". I find this puzzling,
as all the indications are it will achieve quite the reverse. Make no
bones about it, a small exchange (Singapore) with a free float market
capitalisation of $US179 billion in 2009 is acquiring the five-fold
bigger ASX with capitalisation of $952bn. Yet Singapore will have 11
of the director positions and Australia only four.

If scale economies provide an overwhelming advantage then I would
expect ASX to acquire SGX, not the other way round. A rather inferior
minnow expects to acquire a floundering whale.

The Australian Financial Centre Forum created by the Australian
government reports a liquidity (turnover) ranking of all Asian
exchanges. Australia is ranked seventh with a turnover rate of about
125 per cent per annum, and Singapore 12th out of 15 with a turnover
rate of about 75 per cent. . A comparable city-state, Hong Kong, has a
liquidity rate of about 90 per cent and market capitalisation twice
that of Singapore. Hence, what chance will Australia have to become a
major regional hub with its trading platform controlled by an exchange
that has implemented designs making it one of the world's most illiquid?

The second-highest ranked exchange is South Korea with a liquidity/
turnover rate of about 200 per cent. Much of South Korea's success
hinges on it being the most transparent market in the world. It has
achieved this by providing broker identities publicly in real time,
for all trades to all traders. Consequently, prices reflect all
available information, since signals of informed-trader identities are
implicit in broker identities, thus the otherwise uninformed replicate
their trades. The virtual elimination of asymmetric information and
provision of counterparty information ensures that the uninformed
trade with greater confidence, considerably boosting trading volume
and liquidity. Spreads are much lower after taking account of the much
greater private information contained in trades due to more efficient
price discovery.

It is tragic that until November 2005 the ASX possessed a trading
system almost as good as South Korea's, the difference being that the
ASX provided broker identities to other brokers but not to traders
universally. Naturally, this gave smaller and private client brokers a
considerable boost at the expense of the dominant institutional
brokers. When capitulating to the institutional brokers, instead of
adopting the much fairer South Korean system, the ASX abolished broker
identities completely. This was at great cost to efficiency, trade
volume and liquidity on the exchange.

Why is Australia performing poorly as a financial hub? According to
the Forum, one of the main culprits is the ASX in its multiple roles
as market operator, central counterparty and market supervisor
providing a significant barrier to competition and innovation. By
contrast, the new entrant in waiting, Chi-X, has a market share in
Europe equal to Euronext, has responded to requirements for latency
facilitating high-speed transactions, and provides lower transaction
charges for liquidity providers in the limit order book relative to
market orders to encourage greater liquidity.

Access Economics argues regulators elsewhere have approved similar
exchange combinations, such as Euronext. I agree these combinations
have been successful in improving competition.

But a strong or successful exchange usually acquires a weaker one. For
example, the NYSE has acquired Euronext, and NASDAQ has acquired OMX,
the regional Nordic combination. These aggregations are dissimilar to
ASX-SGX, an acquisition by the tiny and underperforming Singapore
Exchange. Control ultimately rests with a foreign government, which
must aim to create its Singaporean hub at the expense of Australia.
European aggregations are quite different.

The ASX proposes to sell itself to an overseas exchange/foreign power
without any say-so from its shareholders. It is unique among
Australian companies and, doubtless, among major exchanges in that its
shareholders have no effective say. There is a 15 per cent ceiling on
shareholding that prevents any takeover without Australian government
approval.

Consequently, the law prohibits hostile takeovers, effectively
insulating the ASX management from market forces and doubtless
severely depressing the stock price into the bargain. Fortunately,
from the perspective of ASX, the relevant section of the Corporations
Act does not need to be repealed for the acquisition to take place,
but a regulatory change subject to parliamentary veto is required.
Should the opposition, the Greens and independents oppose in line with
public opinion, the minority government could face serious obstacles
in approving the Singaporean acquisition.

I propose that the government announce it will approve all
acquisitions under the Corporations Act, effectively lifting the ban
on hostile acquisitions, adding greatly to shareholder value in the
process. In order to provide a window in which market takeover forces
can operate, the FIRB should either ban Singapore's acquisition
outright or postpone consideration of the Singapore acquisition by a
minimum of a year and in the meantime permit new competitive entry.

In this way, the ASX gets a chance to get its house in order while
subject to hostile threat. The nation will benefit and, most likely,
ASX shareholders as well, of which I am one. Only after a time in
which market forces are allowed to operate could there be any
similarity between the formation of exchange groupings in Europe and
Singapore's bid. The ASX is a former icon immune from market forces
that wishes to cut and run at the first sign of competition.

Peter Swan is professor in the school of banking and finance in the
Australian School of Business, University of NSW.