Demutualisation of SET: No cure-all but must go ahead

Traditionally, stock exchanges around the world operate as a “members only” club where they enjoy the rights of ownership and trading.

But during the past two decades, exchanges have come under increasing pressure from market competition, cross-border listings and portfolio flows as well as the rapid innovation in technology that has facilitated alternative trading systems (ATS).

An ATS is in essence a privately operated, computerised system that performs many of the functions of an exchange by centralising and matching buy and sell orders. They are often operated by stock-exchange members.

Together these developments have eroded the significance of physical national stock exchanges and their trading floors. Global stock exchanges have evolved towards new corporate, legal and business models to face new competition.

This transformation from members’ associations into for-profit corporations is referred to as demutualisation. 

The number of exchanges that have been privatised or listed has been increasing since the Stockholm Stock Exchange demutualised in 1993. By 1999, 11 stock exchanges had been privatised or listed, and this number rose to 21 by early 2002, with the Australian Stock Exchange (ASX), The Tokyo Stock Exchange (TSE), Singapore Stock Exchange and Hong Kong Stock and Futures Exchanges are among the new ones. According to the World Federation of Stock Exchanges, 52 per cent of stock-market capitalisation is accounted for by demutualised exchanges. 

In Asia, it is 76 per cent. 

Does it make sense for the SET to follow this trend?

Historically, brokerages and stock exchanges were locally focused. But modern telecommunications have enabled issuers and investors to access foreign capital markets. As nationality has become less of a defining characteristic of capital markets, the relevance of national exchanges is being challenged, and this is more acutely felt in relatively small home markets such as Thailand. Today, in Asia, it is either Hong Kong or Singapore that is the major market for initial public offerings. Even our own Thai Beverage is listed in Singapore. 

Strategic alliances and consolidations are also affecting capital markets and exchanges globally. Mergers among stock and derivative exchanges in the US and Europe are redefining the competitive landscape and creating super-exchanges. Scale is increasingly important, particularly in leveraging technology costs and other investment opportunities. Through alliances, exchanges seek to attract more investors by offering greater product variety and pursuing the conventional wisdom that “liquidity attracts liquidity”. 

The SET’s moves towards full liberalisation and negotiable commissions next year will trigger questions of regulatory oversight. When a demutualised exchange is listed on its own board, some regulatory oversight needs to be transferred to a government regulator. In many countries, demutualisation of the major national stock exchange has been accompanied by general securities regulatory reform. 

Beware that demutualisation is not necessarily a “cure all” for the SET. Critics of demutualisation have argued that the process simply serves to substitute one private interest group for another. The brokerages and later retail investors, who would be shareholders of the exchange, are likely to pursue profit demutualisation goals that may not be consistent with regulatory steps or in the public’s best interest.

In my opinion, standing still is no longer an option for the SET. The fat must be trimmed, investor base enlarged and privatisation of state enterprises restored, otherwise the constant onslaught of globalisation will surely separate the men from the boys. 

At the end of the day, the SET must be competitive to survive. Even if it does not go public, it must exercise self-discipline to make it as competitive as the private sector. 

 

Teera Phutrakul is the founder of JT Financial Planners, which is at www.jtplanner.com.