With the Philadelphia Stock Exchange approving a demutualized structure last week, and some market players advocating a similar for-profit plan for the New York Stock Exchange as it continues its well-publicized reorganization, those markets would do well to look Down Under for guidance.
For the Australian Stock Exchange, migrating from private to public ownership has proven to be a rousing success. After deciding to demutualize in 1996, the ASX effectively split ownership from market access when it listed in 1998, a global first that paved the way for 11 exchanges in Europe and Asia to follow suit.
"The ASX was driven by the view that it could more successfully pursue strategic value to a wider group of shareholders than just the mutual owners of the exchange," said Colin Scully, COO at ASX. Since listing, the initial register of 606 broker proprietors has grown to 16,500 shareholders, with ownership now comprising 25 percent former members, 29 percent Australian institutions, 36 percent Australian investors and 10 percent offshore investors.
"The discipline necessary to function as a listed company was an objective sought by the ASX for the benefit of all stakeholders," Scully said, "and this discipline has reaped positive results. Company growth and performance since demutualization is robust, with ASX market capitalization growing from $419 million to $1.14 billion and total shareholder return outperforming all but four companies in the S&P/ASX 100 Index in this period as well. Costs are down from 84 percent to 60 percent of revenue, while average trading volume has more than doubled from 33,000 to 70,000 trades per day."
According to Scully, a five-year scorecard using industry benchmarks is also noteworthy. "Fees for trading, execution, clearing and settlement average $1.50 per trade or less, ranking the ASX among the world's lowest-cost exchanges," he said.
At just under $533 billion, ASX market capitalization is 95 percent of GDP-an increase of almost 30 percent since listing, with more than 50 percent of Australian adults participating directly or indirectly in the market.
Matter of Trust
Scully believes market integrity is a key success factor for demutualization. "Demutualization effectively separates market access from ownership, with participation criteria not based on membership or access to a trading floor," Scully said. "But listing requires the most rigorous model of governance and management, by adherence to the highest accounting and disclosure standards. This ultimately maximizes transparency for both shareholders and other stakeholders. It also ensures ASX accountability for both commercial and supervisory performance."
New supervisory arrangements for the ASX's own listing were implemented by The Australian Securities and Investments Commission (ASIC) and, more recently, the regulator has been granted powers to conduct an annual audit of ASX supervisory structures and performance. A National Guarantee Fund already in place since 1987 manages investor protection and provides a clearing guarantee to ASX markets.
Scully believes that potential conflicts of interest concerning the ASX being both market operator and a listed entity on its own market is better managed by a public rather than a private entity. Mechanisms in place to achieve this include the fact that ASX does not supervise its own listing rules compliance (this is performed by ASIC); potential ASX competitors can be supervised by an independent subsidiary via ASX Supervisory Review Pty. Ltd.; and ASX licensing requirements under ASIC require it to provide a market that is "fair, orderly and transparent."
"The ASX has a commercial incentive, as well as a regulatory license obligation, to provide fair and orderly markets," Scully said. "If we failed to provide such markets, our business would ultimately suffer, as well as our license being questioned."
Technology Genesis
According to Benn Steil, director of international economics at the Council on Foreign Relations, technology is the principal driver for demutualization.
"Prior to computerization, exchanges had to be organized as mutuals, since there was no trading system as such to sell access to," he said. "Now trading systems are valuable proprietary products and access can be sold worldwide on a transaction basis. Exchanges that demutualize have an advantage over those that don't, all else being equal, because they are not controlled by intermediaries who have an overwhelming interest in maintaining excess intermediation.
"Exchanges that demutualize tend to be those who are faced with more inter-exchange competition, or those with a significant and growing percentage of foreign members, who want to replace one-member-one-vote with one-share-one-vote in order to increase their influence over strategy and structure," Steil added.
But technology seems to be an enabler rather than a driver in the case of ASX's demutualization, because the exchange already introduced computer-based trading via its Seats platform back in 1987, the same year of its national incorporation. According to Scully, this points to a significant difference between the ASX and NYSE.
"Obviously, the U.S. markets dwarf all others by size," Scully said. "But despite intrinsic common characteristics across all exchanges, fundamentally our markets function very differently. ASX is a fully electronic national exchange, where every order in the market is visible to all investors throughout Australia and beyond, with orders matched on a strict price-time priority.
"NYSE is based on a specialist model," he added. "There are proponents and opponents to both models; however, we believe that the electronic, order-driven model, which has proven successful in many markets around the world, is the appropriate one for ASX and our market participants. Another key difference is that ASX owns and operates a clearing and settlement facility [Chess], which NYSE and some other exchanges do not."
However, Steil believes owners of a demutualized NYSE would reap the benefits of electronic trading. This is consistent with his findings that a 10-percent decrease in trading costs in major European and U.S. markets could result in an 8-percent increase in turnover.
"The new owners would shutter the floor because it keeps operating costs way too high, and also because it discourages turnover and, hence, transaction revenue to the exchange, because of excess intermediation cost to investors-costs which don't accrue to the exchange itself as revenue," he said.
The ASX runs a mix of proprietary and vendor-sourced platforms. Seats, an ASX-developed system, trades equities, warrants, interest-rate products and managed investments, which are subsequently cleared by Chess. Last October, the exchange commissioned OM to undertake a suitability study for its Click XT as a replacement for Seats, a move that could enable participants to access all ASX products from a single platform.
Spreading Its Wings
New business models pursued by the ASX since demutualization include taking a 15-percent stake in market data and order management provider Iress Technologies, launching a joint venture with Perpetual Trustees to form ASX Perpetual Registrars Ltd., and acquiring a 50-percent stake in investor relations consultancy Orient Capital. But equities trading still comprises 43 percent of all ASX revenue ($157.8 million, as of June 2003).
Despite a number of cross-border trading initiatives-including ASX WorldLink (which allows Australian investors to access offshore markets via their local broker), co-listing arrangements with NYSE and Nasdaq and the first exchange-to-exchange cross-border trading link, which allows real-time trading between Australia and Singapore for retail investors-building cross-flows remains an elusive goal. "While volumes have not been significant so far, we continue to explore this facility with other regional exchanges," Scully said.
Attracting offshore companies to co-list on the ASX, particularly from New Zealand, remains a controversial strategy. According to Scully, 65 foreign companies have equities quoted on ASX and a number of those are from New Zealand.
But Steil and others believe a more cost-efficient model is to simply allow investors access to offshore listed stocks via their broker and/or that intermediary's offshore counterparty. "Cross-listing is a waste of shareholder capital when cross-border exchange access is allowed," Steil said. "European Union companies have been shedding their secondary listings within Europe since the ISD [Investment Services Directive of the Commission of European Communities, which went live in 2002], and remote membership became the norm."
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