Technology Offers a Bright Spot as Asian Exchanges Lag

Although the financial crisis is posing a host of challenges for Asian stock exchanges, systems and technology remain areas of opportunity, as sales grow increasingly competitive and exchanges continue to build out their systems, said Boston-based research firm Celent.

In a report released May 24, “The Future of Asian Exchanges,” Celent said that since the beginning of the global recession, weakened markets and liquidity problems have undermined valuations and the ability to raise capital, constricting growth at most Asian exchanges. The Hong Kong Exchange, for example, posted a 17 percent drop in profit in 2008, while Bursa Malaysia saw its profits cut by 55 percent in the same period. Such drops are in sharp contrast with the 35 percent compound annual growth rate of IPO capital raised by the exchanges from 2002 to 2007, Celent said.

But even as trading revenue drops, systems revenue is likely to increase as many exchanges seek to cut costs and improve efficiency by adopting more advanced systems. The Singapore Exchange, for example, plans to replace the trading engine in its securities market with a faster model capable of attracting more high velocity and algorithmic traders, said Celent. The exchange is currently working with Nasdaq OMX Group on the feasibility of migrating its equities and derivatives trading to Genium, the latest OMX trading platform.

The Tokyo Stock Exchange is also working with NYSE Euronext to upgrade key areas of information technology, including network management, operations, system capacity, and performance management, said Celent.

Another area of growth, according to the report, is sales of technology to emerging markets by the developed exchanges, as smaller exchanges strive to achieve higher speed and efficiency and better data management solutions. This is resulting in partnerships between developed and emerging exchanges, which can give the developed exchanges a stake in the emerging exchanges, or cause companies in high growth emerging economies to list on the bigger exchanges. For example, the Korea Exchange (KRX) is helping the Mongolian Stock Exchange upgrade its trading infrastructure with KRX’s IT system. “KRX intends to work with the Mongolian Exchange to attract Mongolian companies to list in Korea,” said Celent.

Projects like this are driving growth in an otherwise challenging market, concluded Celent. “As a result of the financial turmoil, implementation of some planned initiatives may be delayed in the near future,” said the report author Arin Ray, an analyst with Celent’s securities and investments group based in Bangalore, India. But in the long run, he said, “economic development in Asia’s emerging countries is expected to spur IPOs and trading activities, and the Asian stock exchanges are well positioned to play a central role in these developments.”