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Yoshikami: Stark Reality for Exchanges that Stand Alone

Monday, 11 Apr 2011 | 9:57 AM ET

It was a major blow for the Singapore Stock Exchange (SGX). Its courtship for its Australian counterpart, the Australian Stock Exchange (ASX), came to an abrupt end when the Australian government rejected the deal last week saying it was not in Australia's national interests. SGX was left standing alone at the altar.

It is a rather courageous move for Australia to turn its back on a suitor willing to pay more than 35% premium for each ASX share. Stock exchanges all over the world are forging alliances, and this fundamental power shift is threatening to isolate ASX.

There has been a bubbling of activityin the exchange space since the start of the near year. Deutsche Boerse and NYSE Euronext announced talks to form the world's largest exchange. Not to be left out, Nasdaq has joined forces with IntercontinentalExchange to launch a counter-bid for NYSE Euronext (which was rejected this weekend). That drama is currently playing out but illustrates the urgency of exchanges to merge. Synergy and globalization are the operative sentiments.

Merger urgency is sweeping the world's exchanges. The London Stock Exchange and the Toronto Stock Exchange have announced plans to merge; and US-based Bats Global Markets has bid for fellow private venue operator Chi-X Europe. Moscow's two largest exchanges, Micex and RTS, signed an agreement of intent to merge while Tokyo and Osaka are considering a merger.

The move towards consolidation is inevitable and is based on a need for relevance and survival in a rapidly changing world of buying and selling shares. Exchanges today are now a world away from what was once a physical place where people came together to buy and sell shares. Customers are demanding cheaper and faster trading systems, and established stock exchanges are struggling to keep up with their clients. Exchange consolidation is a defensive measure to cut cost and defend the territory from electronic exchanges.

You have to be big and you have to have liquidity. Low volumes and flows hurt exchange liquidity. Companies want to list on exchanges where there is strong liquidity, and institutional investors want to know that they can buy and sell easily.Hedge funds, investment banks, and global pension funds want to be able to shift in or out of risks quickly; you need huge liquidity and scale for that.

Despite the rebuff of the SGX offer, ASX may find itself facing a stark future. They either link with a powerful foreign counterpart or risk becoming an insignificant player. When electronic exchange Chi-X opens an electronic exchange later this year in Australia, ASX could lose some of its customer base. This possibility has a precedent. In London, the presence of alternative trading platforms has snatched nearly half of the London Stock Exchange’s market share in less than three years.

Australia needs to embrace the new world. The competitive landscape has changed dramatically, and the future of traditional stand alone exchanges looks dim. National interest? Yes, perhaps. But irrelevance is not in the national interests as well. And standing alone may be a very difficult path indeed.

Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Founded in 1986, YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutional investors and individual investors. The firm works with clients around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009 and 2010. He oversees all investment and research activities of the firm and is actively engaged on a daily basis in the firm's securities analysis activities and determines the macro tactical asset allocation weightings for client portfolios. He works with YCMNET's investment team in integrating behavioral investing strategies with the firm's core fundamental perspective. Michael holds a Ph.D. in education, other advanced degrees, and holds the Certified Financial Planner® (CFP) designation.

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