The four exchanges
In Hong Kong, the established exchange is Hong Kong Exchanges and Clearing (HKEx), which lists futures and options on five equity indexes as well as on gold and HIBOR (Hong Kong Interbank Offer Rate). Meanwhile, the upstart is the Hong Kong Mercantile Exchange (HKMEx), which launched in October with futures and options on gold.
In Singapore, the established player is the Singapore Exchange Ltd (SGX), which lists both commodities and financial futures, and built Asia’s first central clearing facility for over-the-counter (OTC) transactions. Meanwhile, the upstart is the Singapore Mercantile Exchange (SMX), which launched in August with futures and options on gold, crude oil and currencies.
All four exchanges say they’re looking to become global hubs for trading in regional products and all are easily accessed by U.S. traders via retail trading accounts.
That access comes courtesy of people like Christophe Rilinger, head of marketing & communications at RTS Realtime Systems in Singapore. His company focuses on connectivity and the development of algorithmic software, and has been working with SGX and Nanyang Technological University (NTU) to develop the NTU-SGX Centre for Financial Education in Singapore.
Money for the center came from the $250 million "Reach" initiative that SGX is undertaking to build up its trading infrastructure and co-location sites going up in the first quarter of 2011.
"They announced the co-location sites two months ago and 90% of the co-location sites sold out the day of the announcement," Rilinger says.
"It’s going to be difficult for these new exchanges," says Fred Grede, who ran the Hong Kong Futures Exchange before it merged into HKEx and now runs the Chicago-based derivatives consulting group Vega Financial Engineering Ltd.
He gives both newcomers high marks for focusing on hard commodities over financials, but also believes the established players will move in quickly if the newcomers achieve success.
"Both SGX and Hong Kong Exchanges are, for the most part, stock exchanges," he says. "Derivatives have always been a kind of afterthought for them, but that’s already changing as they take a deeper and more serious look at other forms of derivative trading and other kinds of commodity trading."
He points out that both of the established exchanges have new leaders who have stated their desire to build up the derivatives business — former NASDAQ.OMX boss Magnus Böcker at SGX and former JP Morgan China boss Charles Xiaojia Li at HKEx.
"I would increasingly look for these two exchanges to focus more on other kinds of derivative trading for two reasons," Grede says. "One, because that’s where the growth is, and two, because they’re responding to the competitive threat from the [SMX and HKMEx]."
Celent Senior Analyst Anshuman Jaswal, author of the Celent report, agrees and says it’s important to keep in mind that the two newcomers also are competing with each other, not to mention a slew of established exchanges across Asia.
"HKMEx hopes to become a gateway to China’s huge demand for commodity products, while SMX hopes to serve Asia-Pacific’s regional needs as well," he says. "While both would have a niche in their respective region or country, they will face tough competition from the existing exchanges in China (Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange), India (the Multi-Commodity Exchange of India and National Commodities and Derivatives Exchange) and Japan (the Tokyo Commodities Exchange, The Central Japan Commodity Exchange and the Kansai Commodities Exchange)."
He does see one key advantage that both exchanges share over their competitors: both are starting fresh, unencumbered by clunky old technology.
Paul Rowady at TABB agrees. "They don’t have the legacy infrastructure to update as much. It’s easier to build something new than to renovate."
Rowady’s own report, "Trading in Asian Derivatives: Opportunities Near and Far," argues that, despite the rise of Hong Kong, Asia is a long way from agreeing on a bona fide financial center.
Both he and Jaswal stress that the biggest competitor newcomers face in the near term isn’t the established exchange in their own backyards or even the other far-flung Asian exchanges. Rather, their primary competitors are each other.
"I believe that SMX’s parentage will be to its advantage," he says, referring to the fact that it’s a project of MCX’s parent Financial Technologies. "Similarly, HKMEx’s location in the financial gateway of China should be to its benefit. So they are evenly placed."
Rowady, in the TABB report, points out that Asia’s financial landscape is a work in progress, leaving both Hong Kong and Singapore in danger of slipping if China or India relax the current restrictions. "Asia doesn’t really have a financial center," he says. "Singapore and Hong Kong win in part by default, but if China and India open up, things could change rapidly."
Mark Yeandle agrees. He oversaw the Z/Yen survey and recalls that Frankfurt, London and Paris were all within reach of the top spot in Europe just a few years ago.