PETALING JAYA: The prospect of linking all the stock exchanges of South-East Asia — the so-called Asean Trading Link — has titillated regulators and brokers for years. The idea of seamless connection of the equity markets, serving a population of over 600 million, promises ample liquidity that will promote economic growth within a region that already is among the fastest growing in the world.
A collaborative effort among seven exchanges from six countries, the concept gained fresh impetus with news of the launch in June 2012 of a common electronic trading link between the Singapore Exchange and Bursa Malaysia, two of the region's most vibrant and liquid stockmarkets. The third bourse, the Stock Exchange of Thailand, will be connected in August.
These three exchanges with over 2,000 listed counters serve as the cornerstone for the Asean Trading Link which may eventually also connect the exchanges of Hanoi and Ho Chi Minh City in Vietnam, and of Indonesia and the Philippines with a combined total of over 3,600 listed companies and a market capitalisation of approximately US$1.8 trillion currently.
A truly unified regional trading link is compelling. Seamless capital flows among seven exchanges will have spillover economic benefits to lesser developed Asean members.
The link will also promote Asean as a distinct sub-region for asset allocation by international fund managers. And finally, capital flows between Asean and other international financial centres will also increase exponentially.
This is the rhetoric thus far. But will the Asean Trading Link be a myth or reality?
Four regulatory and technological challenges will determine the success of this unified capital market.
First, Asean has a recent history of capital controls as witnessed in the 1997-1998 Asian financial crisis. Even with the right architecture in place, the prospect of sudden government intervention either to restrict the inflow of hot money or to stem its outflow during economic or political uncertainty could prove to be a stumbling block.
Second, while broker-to-broker relationships are common across the main Asean stock markets, the end-customers whether retail or institutional are mostly still not connected seamlessly online.
End-clients still depend significantly on broker-assisted trades, unlike developed Western nations where online trading is the norm for the more investment savvy traders. This, despite computer-generated algorithmic trades being increasingly popular.Third, individual brokers from each country still need to seek their own counter party brokers from another country to sponsor and clear trades. The smaller brokers will find it difficult to get counter party sponsorship as the trust level needs to be individually proven and accepted between both parties.
Smaller brokers usually lack the volume to attract sponsors but bigger brokers generally demand higher volumes and stronger credentials to justify the risk and administration.
As the larger players already have their own regional networks, they are unlikely to route orders through the Asean Link. Hence, the link maybe viewed more of an infrastructure provision that is more relevant and beneficial to medium-sized brokers who have better credentials but lack the regional infrastructure to reach beyond their own borders.
Finally, there is the issue of technology which is a double-edged sword. Asean exchanges have different levels of maturity and best practices in terms of their trading platforms, IT support and redundancy levels at a time when more and more regional exchanges relinquish their role as provider of electronic trading platforms, which are cumbersome to update or maintain amid rapid technological changes.
For example, Malaysia is among the first in Asean to liberalise Direct Market Access, allowing broking houses to select their own vendors to develop a platform as long as it plugs in seamlessly to the exchange's trade-matching engine. Indeed, Bursa Malaysia has set a September 30, 2012 deadline for all securities houses to migrate to the new platform, after which it ceases to provide maintenance and technological support.
By arrangement with The Star/ANN