Where to for the stockbroking fraternity as the markets and the means of marketing slip from its control?

The Australian Stock Exchange (ASX) removed its traditional local broking member shackles by demutualizing and listing on itself. The previous broking industry owners now have to pay fees to a monopolist for what they once made available to themselves on a 'not for profit' basis. Significant reserves and an ever-multiplying market capitalization also provide a basis for ASX to extend its business globally.

Earlier this year ASX engaged in discussions with the Sydney Futures Exchange (SFE) about the benefits of joining their two businesses. The SFE is still a mutual organization of broker members. In May, at the invitation of the SFE, ASX submitted a formal proposal. The proposal of ASX involved its participation in the SFE demutualization with a resulting merger.

There followed not long after an unsolicited approach to SFE from the high-flying share registry and stock exchange software company, Computershare Limited ('Computershare'). Computershare proposed that it become a 50/50 joint venturer with SFE, provide a significant cash sum to flow straight through to broker members of SFE and to list on ASX a new public company with its own equity products, so creating a major competitor for ASX.

Now, just a few months later, all offers have fallen away as the Large Broker Group (LBG), being the nine brokers controlling 70% of floor trading on SFE and who own the majority of its capital, assert their right to a seat at the table.

In the interim, the Australian Consumer and Competition Commission (ACCC) became involved and decided that the combination of ASX and SFE would be anti-competitive. Computershare then increased its offer and required that the SFE deal exclusively with Computershare and only in relation to its revised offer.

Perhaps defying the general understanding about cohesion between broking industry members, the LBG came together and appointed advisers. The exclusivity condition on the Computershare proposal foreclosed variation of that offer or the opening of talks with other potential partners. The ACCC had stymied a parallel restructure with ASX similar to what was occurring in Hong Kong. In that jurisdiction, in great contrast to the apparent Australian view of markets and competition, the Hong Kong stock and futures exchanges reached agreement on the terms of a merger following government pressure. With the Computershare exclusive and fixed offer the only game in town, what was at stake was the whole structure of the industry.

For Computershare the SFE was very attractive, the trend for world stock markets and futures exchanges is consolidation through successive rounds of alliances, mergers and takeovers. That in turn is leading to rationalization among companies that provide software and back-office services to the exchanges and the people who use them.

Computershare's penetration of the exchange software industry has not been internationally significant. While 15 of the world's stock and money markets operate on Computershare developed software, they are mostly small exchanges with little international clout. SFE has made it clear that it is thinking about upgrading its trading system. Winning the SFE as a customer would increase the credibility of Computershare's software business.

Computershare did not recognize, however, that it needed to sell the sellers on its proposal. The real sellers of SFE are the members of the LBG and under the Computershare proposal the LBG had had no input. The LBG had learned lessons from the ASX demutualization and wanted a structure that would satisfy their requirements to run the exchange as a partnership for the benefit of its members rather than as an off-shoot of a software company, hastening the disintermediation that technology brings.

The LBG had little choice but to derail the Computershare proposal earlier rather than later in the SFE demutualization process when the processes themselves may have exhausted the potential players.

For further information on this topic please contact Danny Simmons or Mark Pistilli at Atanaskovic Hartnell by telephone (+61 2 9777 7000) or by fax (+61 2 9777 8777) or by e-mail ([email protected] or [email protected]).

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