The Marriage Of Exchanges More Like A Licence To Print Monopoly Money

The Age

Thursday May 25, 2006

MALCOLM MAIDEN

THE big investment banks have beaten a path to Australian Competition and Consumer Commission chairman Graeme Samuel's door in recent weeks to tell him that the Australian Stock Exchange is a share-trading monopolist that should not be allowed to unconditionally take over the the Sydney Futures Exchange and extend its reach to Australia's futures market.

Yesterday's announcement by the ACCC clearing the merger reveals that Samuel and his colleagues agree, but only to a point.

They agree that both the ASX and the SFX are monopolies, and explicitly describe them so. They also suspect that the exchanges have been doing what monopolist tend to do - extract monopoly rents: ASX and SFX earn "very high returns on capital, well above what is generally found in competitive markets", the ACCC says in its statement confirming that no the merger has been approved without conditions that the exchanges biggest users, the investment banks had called for.

For the record, SFX's return on funds invested was no less than 37.6 per cent last year, and the ASX's return was even more luxurious, at 45 per cent. That's money back in less than three years at the futures exchange, and in barely more more than two years at the stock exchange.

And while the ASX is paying a high price to take over SFX, the merged business will eventually do even better for its shareholders.

Cost savings of between $14 million and $18 million a year by 2008 are "a key plan of value creation" in the merger, ASX managing director Tony D'Aloisio says, and none of it is being passed down to customers: SFX's fee structure will be maintained post-merger, and the ASX is actually raising fees in July, hitting the firms that do the most trading the hardest.

ASX and SFX have been able to hand down fee increases to their victim customers like stone tablets from the mount because there is no competing venues to trade shares and futures.

The merged business will be even more powerful and profitable, but Samuel believes he cannot intervene, because while ASX and SFX operate in the same general market - the one for tradeable financial securities - they also operate in separate compartments of it.

This is the reverse position to the one taken in 1999 by Samuel's predecessor at the ACCC, Allan Fels. ASX and SFX tried to merge in that year, and Fels blocked the deal on the grounds that it would substantially lessen competition. The exchanges had tried to raid each other's markets before and could do so again, he decided.

But after failing to merge, ASX and SFX stopped competing for business, and concentrated on harvesting the monopoly fields they already owned, share trading in ASX's case, and futures trading in SFX's case. Recently the European and US exchanges have been manoeuvering for mergers among themselves, but the Australian market remains an island, ruled by two fiefdoms.

The lack of competition between the two exchanges is now, ironically, what buttresses Samuel's decision. ASX and SFX are monopolists with all the ugly hallmarks of monopolists. But they do not compete with each other, and the ACCC believes there are barriers to them doing so in future, including the fact that each exchange's clearing system is not configured to process the other's securities. In effect, the ACCC has ruled that it would be as easy for an outsider, an investment bank say, to set up in competition with either exchange as it would be for the exchanges to compete effectively with each other.

This leaves Graeme Samuel in a curious position: one of acknowledging that the merger partners are monopolists that are extracting what at the very least are unusually high profits from their customers (alienating the largest of them in the process), but also acknowledging that there is nothing in the law to prevent them marrying - just as there is nothing to stop monopolies in vastly different markets from merging.

Samuel's hope is that eventually competition is delivered from outside, either by the invasion of this market by an overseas exchange, New Zealand's perhaps, or by the creation of competing trading platforms, most probably by the brokers. The more likely scenario, not canvassed in the ACCC statement, is that the acquisition of the futures exchange will give ASX such a stranglehold in this market that it will go unchallenged until one of the big overseas exchanges pays a massive takeover premium, making ASX's shareholders even richer than they already are.

© 2006 The Age

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