Keeping SGX's shareholders and stakeholders happy
WHEN a sample of brokers, investors and newsroom colleagues were asked for their opinions on what the next chief executive of the Singapore Exchange (SGX) should do, these were their varied responses: He should dismantle the existing self-regulatory commercial model, raise the quality bar for listing; bring back the lunch break; attract more big-name initial public offerings (IPOs); ban computerised, algorithmic as well as high-frequency trading; try not to over-regulate the market; introduce more interesting products that investors want to trade, and ensure that investigations into possible wrongdoings are completed promptly so that investors are not kept in the dark for years on end.
However, out of the 15 people approached, only one mentioned that the new boss should also be able to think strategically and have the eye and necessary diplomatic skills to strike business collaborations and link-ups with other exchanges.
More relevantly, only one other person said he should continue growing SGX's very profitable derivatives business, the foundations of which have been laid by outgoing CEO Magnus Bocker.
This admittedly crude illustration highlights the biggest challenge that will face the new CEO. When it comes to SGX, which was formed by the merger of the Singapore International Monetary Exchange (Simex) and Stock Exchange of Singapore (SES) 15 years ago, very few people outside the exchange think of the Simex side of the business; instead, almost everyone focuses on SES' portion.
To be honest, this is not surprising. The growth and contribution from derivatives are only statistics in the minds of the investing public, largely invisible and out of their reckoning because this segment is the preserve of sophisticated institutions. How many people, for instance, think of iron ore, rubber or China A50 contracts when they think of SGX?
From the viewpoint of an SGX shareholder though, it is the derivatives side which is arguably more important, given the recent decline in contribution from the stock market - for Q2 2015 ended Dec 31, 2014, only 26 per cent of SGX's revenue came from securities while 39 per cent came from derivatives.
However, the problem that will confront the incoming chief is that even if the stock market now contributes proportionally less to the exchange's bottom line, it is vastly more visible as it is the primary capital-raising platform for the local corporate sector and the repository of the savings of many retail investors.
Moreover, the equity market is of paramount importance as - in theory, at least - it provides the economy's link with the future by allocating scarce resources to their best possible uses.
Because of this visibility, equities garner the greater share of the public's attention. In this connection, persistent complaints about an archaic dual-role model and the prolonged absence of vibrancy, liquidity, quality of offerings and retail investor presence have been widely publicised, and it explains why when asked about the task ahead for SGX's next CEO, the focus of the majority of respondents would be on how to improve the equity business and not the derivative side.
What the issue boils down to is this: The next SGX chief must find a way to bridge the gap between the demands of the exchange's shareholders and the demands of its stakeholders.
Shareholders would be more than happy with the company's profitability and dividend payouts over the years - even given the diminished contribution from the stock market - and would demand that SGX maintain its growth in the mainly institutional-driven derivatives business. The exchange is today a cash-rich, fundamentally solid company, having been transformed into a major Asian derivatives player under Mr Bocker's guidance.
However, many stakeholders with an interest in the stock market - among them brokers, retail investors and corporate finance people involved in IPOs - would wish for greater vibrancy and consideration for retail interests.
This is not to say that SGX has ignored the equity market - in the past five years under Mr Bocker, the local market's capitalisation has grown by an impressive 80 per cent to $980 billion and the returns from equity investment have far exceeded savings rates.
But the successor must find a way of accommodating the needs of all interested parties - not just shareholders.
THE BUSINESS TIMES