Trading the exchange

Faster communications are providing the catalyst for the merger of bourses around the world. GEOFF SENESCALL reports.

Only nine years ago the Stock Exchange swapped blackboards and chalk gals for electronic trading screens.

That was a big step then and a change which was hardly embraced by all member brokers, especially the older ones.

Today a new challenge lies ahead as merger mania hits world exchanges - and similar apprehension can be heard from the more than 300 local members.

But the prospect of dismantling the exchange's mutual ownership structure and divvying up the proceeds through a share distribution to brokers will, no doubt, focus minds.

The Business Herald understands the exchange has sought valuations. The range is thought to be between $20 million and $60 million, depending on the commercial structure of the new entity. At the top end, that represents around $200,000 for each member.

Demutualisation is certainly a likely consequence if the exchange is to take part in this new wave of activity.

The battle lines are quickly being drawn. This month, the London and Frankfurt exchanges announced they were merging to form a company called iX.

In a back-to-back move, iX is trying to create a 24-hour global sharemarket by spreading its net further through an alliance with the world's second biggest stock exchange, Nasdaq.

Other marriages are also being formed, including the link between the Amsterdam, Brussels and Paris sharemarkets to form Euronext. The New York Stock Exchange, which has been slower out of the blocks, has just announced it is talking to exchanges in Canada, Europe, Japan and Latin America.

The catalyst for this consolidation, according to the Wall St Journal, is a combination of increasingly fast and powerful telecommunication links, growing demand for shares in foreign companies and a fear of being overtaken by the merger of competing exchanges or by electronic trading systems.

Certainly from an investor point of view such alliances make it easier to trade in overseas-listed shares, as long as regulatory requirements in the investor's country are met. Basically, big institutions want fewer exchanges while retail investors welcome better access to foreign shares.

A further benefit, according to the Economist, is the potential for companies to gain easier access to foreign capital.

Closer to home, the Australian Stock Exchange is also leaping on the merger bandwagon. Its chauffeur-driven chief executive, Dick Humphry, commented last week that it was a case of "get big or get out."

The ASX, a listed company, already has an alliance with Nasdaq. But it is also trying to muscle into the London-Frankfurt initiative.

Reports out of Australia suggest the ASX also wants to link with the Singapore, Hong Kong and Japanese exchanges.

The aim is to get a bigger share of the all-important Morgan Stanley Capital International Index and, therefore, greater recognition in the global investment community.

With Japan accounting for around 13 per cent, the Australasian grouping makes up around 16 per cent of the MSCI.

Couple that with iX, which has 18 per cent, and the total is a formidable 34 per cent.

That compares with the United States, which has 47 per cent of the world sharemarket by value.

Where New Zealand fits into this global patchwork is still to be determined. But these developments have not gone unnoticed by the local exchange's executives.

Its chairman, Eion Edgar, last week confirmed the exchange was talking to three parties. He will name only Australia, but the other two are believed to be Singapore and Canada.

The exchange has also sought independent advice from Boston Consulting.

The lure of being able to tap into nearly half of the world's listed public companies is strong for an isolated country like New Zealand.

If vision becomes reality, investors will almost certainly gain the ability to buy and sell global equities freely and to settle the transactions here.

Wanting to be part of the global consolidation is, however, not the only thing motivating the exchange to assess its options. The sharemarket's dismal performance, combined with the exodus of companies from the leader board, has also been influential.

Highlighting the issue was Lion Nathan's decision this month to shift its primary listing to Australia. This follows Nufarm's move across the Tasman earlier this year. Both were top-10 stocks.

The breakup of Fletcher Challenge is set to further water down the local market, and there are rumours that more will follow.

But any impulse to jump into bed with Australia - our obvious partner - in a bid to give New Zealand greater recognition might be folly. Across the Tasman, the same issue has surfaced. In the week Lion announced its move, reports from Australia revealed that its best companies were leaving for greener pastures.

A further consideration is that the New Zealand exchange - the eighth smallest in a federation of 54 exchanges - is one of the most efficient. Its costs are half that of Australia's.

This point is something exchange chief executive Bill Foster is quick to raise. "It's not much benefit for us in being taken over by someone who can't cut our costs.

"We have to look for other reasons, like getting relationships. Therefore parties other than the ASX might be useful to talk to."

Mr Foster's claim of efficiency is not just a parochial view.

Praise about the New Zealand exchange also comes from Computershare, an Australian company which is the world's largest share registrar, managing 50 million shareholder accounts across seven countries, including New Zealand.

Its Melbourne-based strategic development manager, Stuart Crosby, says: "We are great fans of the New Zealand exchange, of the way it's run and of its business model.

"The New Zealand settlement system is as good a model as exists in the world.

"I think it is an infrastructure crying out for additional volume through it. The question is how do they do that?"

Mr Crosby says the problem New Zealand faces if it joins the ASX is that the Australian exchange will want to use its own system - despite the fact New Zealand has better trading and settlement systems.

One of the reasons Mr Crosby is so knowledgeable about the New Zealand exchange is that Computershare recently tried to entice it to join in setting up an alternative Australian exchange. The plan never got off the ground, and Mr Crosby does not want to talk about it.

A check of local institutions and brokers show there is some unease about what might lie ahead, particularly if there is a merger with Australia.

The fear is it will simply lead to institutions and broking firms servicing New Zealand out of Australia. This means jobs would go. The loss of this high-spending group would have an effect on all sectors of the economy - from lawyers to taxi drivers.

Stephen Walker, equities manager of New Zealand's largest fund manager, AMP, believes it is inevitable that stock exchanges will merge. "That will create some efficiencies, maybe not in trading New Zealand stocks, but in trading stocks globally."

Having said that, Mr Walker is not in favour of a merger of the New Zealand and Australian sharemarkets. "Large companies will attract investors, will attract interest and have access to capital," he says. "But it is important for the New Zealand economy that companies that do need capital, which are mainly smaller and medium-sized companies, have access to the various capital markets.

"If we lost the New Zealand exchange ... it would make it more difficult than it already is for companies to access equity capital."

Having a local sharemarket is also "a useful signal in terms of international investor perceptions of a country and its economic and political policy."

The fundamental reason for a sharemarket is for companies to raise capital, and he believes the New Zealand sharemarket is not delivering this well.

But, he says, that is not because there is something wrong with the exchange. It is simply because of a lack of savings and the absence of a level playing field for taxation.

The job ahead for the New Zealand exchange's board is to decide what is best for the exchange and put a proposal to its members.

The Acting Commerce Minister, Trevor Mallard, says the Government will not stand in the way of any measures the exchange might take to improve the performance of the sharemarket.

The real challenge, then, for the board is to marry the needs of its members and users. Basically, the exchange services investors, shareholders of companies, the companies themselves and the brokers, who act as intermediaries. Each has different needs, especially broking firms, some of whom are owned locally and others internationally.

Mr Foster is well aware of the difficulty of the task ahead. He is cautious about drawing too many parallels from Europe, which operates within a common market and common currency.

While better access to overseas markets is one thing, there is also the real issue of the lack of liquidity in the domestic market. The ability to buy and sell shares easily is one of the biggest influences of share prices.

Mr Foster says it is not clear whether it is better to merge exchanges and create a bigger market that gets more investor attention or to just link them and have marketing arrangements jointly promoting stocks in both markets.

"The trend these days seems to be, particularly in our region, that markets will rely on the home exchange concept. That is, you do away with dual listing and route all the orders to the country of incorporation of the company and you pool all the liquidity there."

Mr Foster sees similarities with the global airline industry, where the trend has been to form alliances. Both airlines and exchanges operate within regulated environments, where ownership is a political issue.

"The board of the exchange has spent the last five years thinking about what is best for the market ... We have always been looking for a better option."