Analysts are of the view that the cost of competition will drive greater consolidation in the U.S. and Europe. Once this wave of growth opportunities mature, the mega-exchanges will look to Asia as the next frontier of growth. Regional exchanges need to gear up for the competition and find ways of staying relevant to the international network of traders and investors. Shutting out competition and maintaining the status quo is not a viable option. More companies will seek alternative pools of liquidity and investors if domestic exchanges cannot satisfy their need for greater liquidity and connectivity to a larger network of traders and investors. Investors will also bypass local exchanges to invest overseas. Engaging in deeper regional collaboration What can governments and exchanges do? There are several initiatives that we should consider. Capacity building Firstly, capacity building in the region. Regional capital markets, particularly Asian bond markets, have made significant progress in recent years. There is however, scope for us to continue to explore ways to further grow and develop our capital markets. Capacity building plays a critical role in this respect. Concerted efforts to enhance the skills and sophistication of market players and regulators will not only strengthen markets but also provide an essential pre-condition for closer collaboration amongst the regional capital markets. To this end, ASEAN finance officials have agreed to collaborate on a training initiative to enhance regional expertise in capital market development.

The wave of consolidation has, however, created mega-exchanges in the U.S. and Europe, and competition among them has proceeded at a furious pace. The Chicago Board of Trade (CBOT) faces a serious challenge on its home turf from Eurex, the all-electronic exchange owned by Deutsche Börse and the Swiss Stock Exchange. Eurex is now offering electronic trading in U.S. dollar denominated fixed income futures which have been the mainstay of the CBOT. The pan-European exchange, Euronext.Liffe, is offering electronic trading in Eurodollar futures contracts in direct competition with the Chicago Mercantile Exchange (CME). CME has responded quickly, announcing initiatives to accelerate the migration of its flagship Eurodollar contract to GLOBEX, its electronic trading platform. And just this month, it was reported that the New York Stock Exchange may enter the derivatives market too. Hardly a week passes without press reports of strategic moves by the exchanges. Securities exchanges have not been spared from the competition. London Stock Exchange (LSE) will launch its Dutch Trading Service, euroSETS, in May this year. This will allow the most liquid stocks listed on Euronext-Amsterdam to be traded through LSE. This bold move is being watched closely by the industry, and may challenge conventional wisdom on the contestability of stock exchange liquidity. The outcome of these contests could significantly alter the competitive landscape for exchanges in the next few years. Key drivers of consolidation and competition One key driver behind the consolidation and competition is technology. Exchanges and clearing houses are very much technology businesses today.