Change has been afoot in the world of stock exchanges for some time. As the global marketplace becomes increasingly competitive, exchanges have been expanding their reach across borders, striking up alliances (and breaking them), upgrading their trading systems, and generally trying to survive. In this highly charged – and highly costly – environment, the question of demutualization has arisen at almost all of the major financial exchanges. In Europe, the Swedish, German and UK exchanges have become public entities. Indeed all but two or three western European exchanges are now joint stock companies. Vienna, for example, is now 50 percent owned by issuers while Oslo was about to float at time of press. Euronext, the pan-European alliance of the Paris, Amsterdam and Brussels bourses, debuted in July. Further afield, exchanges such as Hong Kong and Australia have also gone public.
A tight-lipped spokesperson for the Hong Kong Exchanges (HKEx), which listed in June 2000, comments, ‘As a publicly listed company, we’ve been able to raise capital more flexibly than a mutual association because we’ve had access to the markets.’ She continues, ‘Access to such funding is essential given the increasing financial burdens facing the exchanges, arising from the need to provide users with state-of-the-art trading and settlement systems.’
Germany’s Deutsche Börse, also now a listed public company, makes a similar statement, though its emphasis is on growth: ‘The Deutsche Börse was floated on the stock market in order to pursue its internationalization strategy. The fresh capital will enable us, as a fully-integrated European exchange organization, to finance our growth within the sector of e-commerce in securities and derivatives, consolidate our existing markets and also create new ones – in Germany, in Europe and beyond.’
Small & quick
This cost issue is of particular importance for the smaller exchanges whose chances of survival in the battle of the bourses are slimmest. The Australian Stock Exchange, tenth on the world stage in terms of size, was the first exchange to list in 1998. Comments investor relations officer Phil Wilson-Brown, ‘If you’re smaller you’ve got to be quicker in terms of adapting to changes in the market and being as competitive as possible. So many exchanges are now undergoing a listing and we’ve got a two-year head start on them. That counts for something.’ Wilson-Brown identifies reasons similar to those of other exchanges for going public but stresses the need to keep one step ahead of the market. ‘We realized that the market for exchanges was changing pretty rapidly and we needed to anticipate where that change was heading.’
Germany’s Deutsche Börse identifies the more democratic ownership structure of listed companies as another major plus in going public. ‘The flotation was a prerequisite if major international investment banks and private investors were to participate in our success and exert an influence on our course,’ comments a spokesperson.
The Australian Stock Exchange’s Wilson-Brown agrees: ‘The market was previously owned by one group of constituents – the brokers – and as a mutual we were required to operate in their interests. Now for example, the banks are participants. In other words, we are now able to focus on the interests of all our customers, not just the brokers.’ He says it also allows the ASX to take a more flexible approach: ‘We used to have to get the agreement of all 600 of our members before we did anything. We’ve now got more of a mandate to make strategic decisions.’
Apart from the London Stock Exchange, almost all the listed exchanges have a 4-5 percent shareholding limit to ensure a diversity of ownership, and to protect against unwanted predators. This is, however, something that the Australian Commonwealth Government is in the process of reviewing. Indeed, there is a proposal before the Australian parliament that the limit be increased to 15 percent, a suggestion that could be written into law by October. And, judging by the ASX’s trail-blazing role so far, this could be an issue facing other exchanges in the not too distant future.
Setting benchmarks
But being a listed company is surely not all a bed of roses. For starters, if you want any credibility in the market you’ve got to establish a decent investor relations function. Has this been problematic for any of the exchanges? Not according to them. At the London Stock Exchange, the IR team reports directly to the director of finance, Jonathan Howell. Howell points to the LSE’s own investor relations web site as an example of the exchange’s place at the cutting edge of good IR practice.
The LSE became a public company in May 2000 and gained a full listing in July 2001, and Howell is adamant that investor relations has been a priority from day one. ‘Good investor relations is something the exchange has actively promoted amongst companies listed on its markets and is an area where we have wanted to lead by example by employing best practice in our own investor relations,’ Howell concludes. To illustrate the LSE’s commitment, he points to the fact that the exchange, although not required to do so until fully listed, has been committed to publishing any price-sensitive information through the Regulatory News Service (RNS).
The Australian Stock Exchange’s investor relations department seems equally confident, and it too maintains a direct line to the CFO, despite working in the corporate relations department. ‘Our view is that it’s very hard to separate the two functions. We think they need to be closely tied together,’ says the ASX’s Phil Wilson-Brown, who handles IR and PR. Like the London Stock Exchange, the ASX uses its web site as its main mode of communication with investors. Annual reports, results announcements and the like are also e-mailed out to analysts, the media and other interested parties. Wilson-Brown also stresses the exchange’s wish to lead by example in terms of investor relations. ‘We take the view that we have to set the benchmark in terms of IR best practice.’
Investor views
But is this all empty rhetoric or are the exchanges doing as good a job at IR as they think? Chris Sleep at stockbrokers JB Were in Sydney is in the main impressed by the Australian Stock Exchange’s efforts. ‘Given that they are effectively a mid cap, compared to companies of a similar size they are probably better at IR. My first port of call is the designated IR person but he is very good at getting me access to the CFO or the deputy managing director or even the managing director if I need it.’
Sleep is particularly impressed by the Australian Stock Exchange’s transparency. ‘Their data on the revenue side is really detailed. Every day you can track how many trades go through if you want. For other companies you’ll often have to dig around a lot for that sort of information but with them it’s all there.’ He also points to the fact that the Australian Stock Exchange reports on a quarterly basis, which is only a requirement for mining companies in Australia. ‘That kind of voluntary disclosure gives you confidence in them.’
Shane Fitzgerald at JP Morgan in Sydney agrees that the Australian Stock Exchange is doing a pretty good job. ‘Bear in mind that it’s the only stock exchange I look at but I think it’s doing pretty well. It’s very good in terms of information flows and very proactive in terms of educating the market,’ he says. He puts this quality down to general improvements in IR across the board as well as the Australian Stock Exchange’s unique position as an exchange. ‘I’ve been analyzing stock for the last eight years and seen an enormous improvement across all companies in the market. Their IR practices are much more professional, much more hands-on than they used to be. On top of that you’ve got the fact that the Australian Stock Exchange has a regulatory function so it’s got to set a high standard.’
Although being its own regulator may have advantages in terms of an exchange’s reputation as a listed company, it also can bring with it potential conflicts of interest. Comments Simon Brocklebank-Fowler of UK-based Cubitt Consulting, ‘One lesson we’ve learnt from the investment banking world is that there is no such thing as a Chinese wall in a competitive marketplace.’ He goes on to warn, ‘You’re always going to run the risk of different functions of an organization overlapping.’
Public platform
Brocklebank-Fowler says he is perfectly comfortable with the idea of the service provision of a trading platform being in the public domain. He is insistent, however, that the regulatory function of an exchange needs to be handled separately. ‘If you take any of the utilities, for instance, the regulatory function is always dealt with by a separate body. That’s essential to ensure fairness and confidence in the market.’
In practice, many of the stock exchanges do still have a regulatory function, although the regulatory responsibility for the main market was transferred from the London Stock Exchange to the UK Listings Authority (part of the FSA) in May 2000.
Other stock exchanges have retained their regulatory functions in full. The Hong Kong Exchanges are one example, although they would not be drawn on any potential conflicts of interest that might arise. The Australian Stock Exchange has also retained all of its previous powers although IRO Phil Wilson-Brown is keen to stress that the stock exchange has a supervisory rather than a regulatory role. ‘There may be a perception of a potential conflict of role but this doesn’t have any validity in our view.’ JP Morgan’s Shane Fitzgerald agrees. ‘The Australian Stock Exchange is supervised by a government organization. So a company listed on the market has to comply with the ASX’s rules and the exchange has to report to the government so it’s not supervising itself.’
Fitzgerald suggests that a conflict of interest is more likely to exist in joint ventures that a stock exchange might undertake with other companies. In the Australian Stock Exchange’s case, however, Fitzgerald thinks it is moving towards resolving the situation. ‘They are suggesting splitting the organization into two parts, so the supervisory side will be separate with its own board and its own management team,’ he explains. ‘There is always still the potential for a conflict of interest but with the functions separated in that way they are going to be eradicated as much as possible,’ he adds.
Wilson-Brown disagrees that the creation of a new company to review and enhance the exchange’s current regulations will create a conflict of interest: ‘We view our supervisory activities as a core function. The integrity of our market is crucial to its success and therefore it is in our interests to ensure it is maintained to the highest standard.’
But for Cubitt Consulting’s Brocklebank-Fowler, the ASX’s move confirms the anomaly. ‘If you need to take a step like that, you are effectively agreeing that the functions should be handled by different bodies.’ As well as the Chinese walls issue, Brocklebank-Fowler is not convinced of the efficacy of stock exchanges listing their stock altogether, certainly in some cases.
Cubitt Consulting, for example, represents the Tel Aviv Stock Exchange, which is run on a similar model to the old London Stock Exchange. ‘I must say that I am very happy that it is unlisted,’ says Brocklebank-Fowler. ‘Tel Aviv represents an emerging market with lots of political and economic risks and in that situation exposing an exchange to the vagaries of the market would be unwise,’ he explains. Brocklebank-Fowler is also of two minds as to whether, even in less vicarious situations, the merits of being a listed company outweigh the demerits. ‘There are obviously issues such as the effects of globalization and the need for capital raising driving these listings but at the end of the day one wonders how liquid the stocks really are.’
In theory, a stock exchange should set an investor relations example for its own listed companies to follow. This hypothesis is looking better and better as more and more exchanges hit the market.
