Funke Kupper's work cut out for him at ASX, but odds running in his favour

The exchange's first attempt at a big international merger has come to nothing, and in the next year or so Funke Kupper must find an alternative, or alternatives. Funke Kupper will already know that the ASX is not stranded after the collapse of Singapore Exchange's $8 billion takeover attempt in April. The Toronto Exchange is the obvious next port of call.

The ASX is also about to lose its trading monopoly in this country. Nomura-owned Chi-X will begin trading six blue chip stocks, BHP Billiton, CSL, Leighton, Origin Energy, QBE and Woolworths, at the end of this month. More stocks will follow on the Chi-X platform, and more exchange operators will follow Chi-X in. The ASX is not powerless to withstand that onslaught either.

It's one of the most efficient exchanges in the world, vertically integrated because it clears and settles its trades, and as exchanges go, it is a reciprocating engine. When shares are on the nose, investors move towards bonds, and the big ones use derivatives to do so. And since its 2006 merger with the Sydney Futures Exchange, ASX has had a foot in both asset classes.

Cash market revenue in the ASX's year to June 30 for example fell by 11.2 per cent or $16.9 million to $133.9 million after ASX halved trade execution fees ahead of the arrival of Chi-X, and as equity market values dipped. But derivatives market revenue rose by 16.5 per cent or $24.4 million to $172.2 million, and group revenue rose by 5 per cent, to $617.6 million.

ASX is installing new systems to maintain its position as a relatively low-cost platform that retains only about 5? for every $1000 of value that is traded, cleared and settled. It's an essential upgrade as competition arrives here for the first time, but one of Funke Kupper's early jobs will be to defuse customer tension about the pace of change.

The group's big customers, the investment banks notably, will tell him they are being stretched as ASX introduces new systems including Pure Match, an order routing system that will find the best quote for users, and as it moves its co-location facility that hosts investment bank and broker systems that dovetail with the ASX platform from cramped quarters in Bondi Junction to more spacious ones in Gore Hill in Sydney's northern suburbs.

There's a sense among the big users that the exchange is moving to its own timetable, in an unforgiving and even arrogant way. That's not the face the group wants to present as it loses its monopoly and enters an era where it is competing for trades and everything that flows from them, including primary listings: Funke Kupper needs to adopt a more collaborative approach.

The technology that is being installed, however, is one of the keys to ASX's future. Revenue from equity transactions now accounts for only about 6 per cent of ASX's total revenue, and it is that relatively small slice that is being attacked by Chi-X.

And while Pure Match will actually stream trades away from ASX and towards Chi-X if the best quote is located on the Chi-X platform, traders will pay ASX a monthly fee to access the Pure Match system. ASX wants to be a pay gateway to trades, wherever they occur, and unless it is stripped of its monopoly over clearing and trading, it will also continue to book income on those legs of the deal (it has for example contracted to clear and settle Chi-X trades here).

Treasurer Wayne Swan ordered up an inquiry into the clearing and settlement system after blocking the Singapore Exchange takeover. But it should not result in ASX losing its role as the market clearer: there are significant economies of scale from the single operation that reduce transaction costs for users as well as ASX, and the joint Treasury, APRA, ASIC and Reserve Bank committee that is investigating has not been told to consider ownership.

Funke Kupper will be keen to keep plans to create a retail Commonwealth bond market on track. The government announced last December that it would create the market, and it is working now on tenders for the operation of a bond registry, and the provision of the retail market.

This is an overdue move. Commonwealth bonds would have been an ideal retail investment alternative this year as shares tanked. One irony is that the introduction of competitors to ASX has slowed the process by requiring tenders. ASX is a shoe-in to get the job, however, because Chi-X only wants to trade shares. If markets remain volatile, Commonwealth bond trading will be a success when it debuts.

The new CEO's longer-term job is to find ASX a partner. And despite assertions that ASX has been stranded by the scuttling of the Singapore Exchange takeover, Funke Kupper is still bringing a decent dowry to the table. The ASX is efficient, supported by investment flows from Australia's superannuation system, astride both the equities and derivatives sectors, and in Asia's time zone.

There's no other exchange that offers that combination, and after the collapse of the London Stock Exchange's proposed merger with Canada's Toronto Exchange earlier this year, Toronto is the obvious choice. A merger or alliance would create a mega-resources exchange that crosses time zones, and feeds into Asia's capital markets by virtue of the trade connections of the companies it hosts. A tie-in with the London Stock Exchange could follow.

mmaiden@theage.com.au