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Technically Speaking: Go-ahead ASX makes the stuffy old NZSE seem much worse

Friday 19th May 2000

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Australian Stock Exchange Ltd Australian Stock Exchange Ltd

Someone who is likely to become better known to the New Zealand investment community is Australian Stock Exchange (ASX) managing director Richard Humphrey.

The autumn 2000 edition of INSTO, an Australian investment markets magazine published by the Sydney-based Financial Intelligence Agency, has an in-depth interview with Mr Humphrey on the future of the ASX.

The article is a probable pointer to what lies ahead for the NZSE once it stops playing silly games as little Miss Hard-To-Get and merges with a bigger partner.

Mr Humphrey is an out- spoken man of vision and concision, a corporate heavy-hitter whose job has significant influence over Australia's fate as an international capital market.

He oversees a go-ahead listed company, the ASX (chart 1), which in March had net assets of $A180 million, revenues of $A152 million and a sharemarket capitalisation of $A1.5 billion.

Not a man to be accused of smug idleness, he has no illusions about the need for the ASX to stay globally active and competitive as a place to raise and trade capital.

His "reality check," as he puts it, is that Australia's sharemarket, which has grown 225% in domestic equity capitalisation from $A200 million to $A655 million in the past five years, is just 1.2% of the Morgan Stanley capital index.

The MSCI is colloquially known as the "finger of God." It can make or break a sharemarket by including or excluding it and, by the weighting it gives each market, it sets the rationing pattern for index-based managed funds global capital allocation.

The ASX will be challenged eventually by MSCI inclusion of the huge emerging sharemarkets of China, India, Taiwan and Indonesia. It is already preparing for that day in trying to increase its domestic market capitalisation dramatically.

New Zealand was weighted at a mere 0.2% of world sharemarket capitalisation, one-sixth of Australia's weighting, even before it started haemorrhaging major corporate listings and nowadays is probably below the margin of error for notice by many fund managers.

The New Zealand sharemarket also has a dirty international reputation for lax rules, weak sanctions and arbitrary government interference in listed industrial sectors such as fishing, airlines, telecommunications and electricity supply.

Put another way, even if it did merge with Australia, the NZSE would take the Australians only out to 1.4% in the MSCI at maximum and much of the New Zealand capital contributed would be junk.

That's not much of a poker hand for the NZSE to stake its fortunes on and the ASX has bigger games to play.

It has assiduously courted US listings.

It took six months to hammer out a deal with the US Securities and Exchange Commission (SEC) to gain acceptance under regulation S for listing US-based firms.

The ASX and the Easdaq are the only non-US sharemarkets to have brand-boosting SEC regulation S approval, which could either tip the NZSE's fate in Australia's direction or prove an insurmountable obstacle to merger.

A regulation S-approved share market can be regarded as being up to benchmark US regulatory standards, an acid test the NZSE would probably fail.

It should prove easy for the ASX to plug New Zealand into its Seats real-time ECN system, which refreshes its on-screen information 10 times a second.

Seats has been the first successful electronic merger of federal state sharemarkets in the world, the Canadian attempt having failed, according to Mr Humphrey.

The ASX's Seats electronic infrastructure covers six former state-based stock exchanges across a territorial span of 4000km and has 3000 terminals Australia-wide, of which 1500 are described as trading terminals with open interface facilities and direct electronic links with other systems.

Mr Humphrey claims the Seats system is more advanced than anything in the US, with quotes showing narrow spreads offered in tenths of a cent, which if done in the US would double sharemarket turnover.

By contrast, spreads can range up to $US7 in the US, despite SEC-imposed reforms of the Nasdaq.

Ten years ago, the ASX's homegrown Seats could handle 350,000 trades per day but now the exchange is targeting triple that at a million a day to facilitate the huge jump in internet trading of its listings.

New economy US firms in the smaller company capitalisation range of $A200-300 million are being aggressively pursued by the ASX, which implies share markets must be effective international lobbyists and marketers of their services if they want to survive.

Exchanges must be willing to go out and recruit listings on the basis of uniquely adding value, rather than sitting around as lazy ticket-clippers thinking themselves the only game in town and leaving things to happenstance.

The NZSE, in contrast to the ASX, would be hard-pressed to find many local companies of equivalent value wanting to list in New Zealand, let alone US corporations.

If the ASX's recruitment strategy succeeds, it will be biased to US-quality smaller cap growth stocks that will eventually leverage up its MSCI weighting against new-entrant competitor share-
markets and keep fund manager money rolling in.

In March this year the ASX scored US-based companies Digital, LookSmart and Axxon Instruments. Digital listed 250% oversubscribed while Axxon was a record 600% oversubscribed, the highest ever internationally for a company of its type.

Some Australian firms such as Resmed and Capuity are returning to the ASX from US listing.

As the New Zealand-based but Australian-offered IPO Telemedia found, the ASX is the place to list in preference to the NZSE, unless you are a stamp dealer or are retailing beauty products online.

Mr Humphrey said Australia used to be seen as a place to dig things out of the ground but the structure of the sharemarket had changed radically.

Resources are now only 18% of total ASX listings. Manufacturing, dominant in investor focus during the 1980s but declining since, has dwindled to about 25%.

The big winner has been services - banks, insurers, media and new economy stocks - at nearly 60% and climbing.

The ASX is well down the new-economy track to being a service industry sharemarket. It has branched out into providing generic backroom services for brokers who can reduce themselves to shopfront operations.

It has a fully up-to-date immediate settlements system. Its screen-traded listings go beyond shares to include fixed interest, warrants and derivatives.

This year the ASX revamped its indices with assistance from Standard & Poor's, which should increase the quality and reputation of its market information. Emphasising dataflow over shopkeeping as a 21st century theme for bourses, Mr Humphrey said of the ASX : "We are a very significant issuer of signals all around the world."

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