Stock exchange merger would end Australia’s ‘inward focus’

Australia’s financial sector would be strengthened if the proposed merger between its national stock exchange and the Singapore Exchange gained political approval, the Australian Centre for Financial Studies (ACFS) has argued.

In Australia, the merger has drawn political opposition because it is seen as weakening the nation’s case for becoming a regional financial heavyweight – however, the merger could be the catalyst for Australia to achieve greater financial strength in the region, the ACFS asserted this week.

Even though Australia has the fourth largest pool of funds management assets in the world, most of this is in the nation’s compulsory superannuation system and a small portion of it was sourced from offshore investors.

These points were stressed by a 2009 government-commissioned report, Australia as a Financial Centre, which laid out proposals to increase the market’s financial strength in the region. The ACFS stated the stock exchange merger “ticks all the boxes” set by this report as it would increase the size of the market, lower costs and broaden the range of options for consumers and businesses, and adhere to strong regulatory standards.

This “inward focus” could be changed by integrating Australia’s capital market with another reasonably large exchange, potentially boosting trade in financial services between the two markets, in addition to competitiveness and efficiency, the ACFS stated.

The centre noted that little research had been done into the effectiveness of stock exchange mergers – which began in the late 1990s as privatisations of government-owned exchanges and progressed into a phase of consolidation, such as the merger between Europe’s OMX and the NASDAQ in the US – but pointed to upcoming research on the Euronext, a merger of the Amsterdam, Brussels, Lisbon and Paris exchanges.

The study, by Ulf Nielsson at Columbia University, and which will be published in the Journal of Financial Markets, found that larger listed companies – particularly those with big foreign sales – benefited from the increased liquidity of the bigger market. The merger also enabled Euronext to claim market share from the London Stock Exchange – although there was no evidence of an increase in competition to attract new listings.

Similar dynamics could benefit large Australian financial and resources companies, while the combined strength of Singapore and Sydney – currently ranked fourth and tenth as global financial centres – could become more competitive against regional rivals Hong Kong, Shanghai and Shenzen.

It could “re-position” Australia’s bid to become a significant market in Asia, the ACFS stated.