Are we ready for global trading?

The New York Stock Exchange will run a pilot program this year to test a global stock exchange, comprising ten of the world’s leading markets, including Australia. This Global Equities Market (GEM) is planned to allow for around-the-clock trading and to give companies multiple listings.

What would global stock markets mean for investors? How would the Australian system cope with globalisation?

The other members of the pilot GEM program include Hong Kong, Japan, Brazil, Mexico, Canada and Euronext, the pan-European market of Paris, Amsterdam and Brussels.

For a start, with global stock markets just around the corner, Australian stockbrokers will need to upgrade their systems to compete. Our stock market reforms over recent years have greatly increased efficiency, but now around the world, the next big reform is faster share settlements, and we will need to speed up too.

But local investors will need to be patient, according to the findings of our third annual survey of "Attitudes to Outsourcing and Administrative Reform in Australian Stockbroking". Brokers believe investors will have to wait at least two years and possibly as long as five for the next major step forward here in faster share trade transactions. With globalisation, our brokers should rethink the need for speed.

It is disturbing that among the main barriers to faster trades in the local market are the retail banking system and brokers' computer systems. Neither can handle the inevitable pressure of faster trades, without major changes to their capabilities.

For investors, the issue of faster trades is vital. Internationally, most stock exchanges, like our own, require the final payment or payout of a share purchase or sale within three days of the actual transaction (this is called T+3). Overseas markets, particularly in the U.S, are moving to cut share transaction times from three days to one (T+1). We will have to keep up.

This is a significant national economic issue, as moves such as GEM by the NYSE will offer international investment with the ease and immediacy possibly not even available for local investments. For our economic strength, we have to retain our part of this global trading.

As investors start broadening their horizons, encouraged by the globalisation of world markets, there will be an increase in the purchase of foreign stock that will put even more pressure on our settlement systems to perform smoothly and quickly.

Will Australian investors welcome global stock markets? Our survey respondents believe that Australian investors will move to purchase foreign stock gradually over the coming years. 46 per cent believe that by 2005 between six and 10 per cent of all stock purchased by Australian investors will be in foreign stock. Almost 30 per cent rate overseas purchases to be as high as 11 to 25 per cent of share portfolios. These figures could be on the conservative side, for respondents are dealing with a "future" prospect, once global markets are here, local investors might embrace them with great enthusiasm.

Australian investors could leap at the opportunity to spread their money on a world stage, instead of focusing it locally in a share market accounting for less than two per cent of the world's available stocks.

The vast majority of respondents (88 per cent) believe these Australian investors will prefer to buy foreign stocks through the Australia Stock Exchange (ASX) with Australian dollars. But how long will this last if the settlement systems are slow compared with the bigger markets?

Our problem is not change itself, for we do embrace it, but that we are not moving fast enough. 90 per cent of respondents believe that the ASX will move to a T+1 settlement regime within five years. Yet less than 20 per cent expected it in the next year. Three quarters thought two to five years was most likely before speedier trades and seven per cent thought it would take six to 10 years. Five or more years isn't good enough: ideally, Australia would implement T+1 within this or next year, or risk being left behind.

Many investors would welcome moves by Australian stockbrokers to upgrade their computer systems. They should be well motivated to do so: speed reduces risk, so we all have a lot to gain by faster processing. For many brokers, this will spark a review of the way they conduct their businesses, and increasing alliances with application service providers.

With the higher service demands from investors and the prospect of global markets, brokers can no longer go it alone and our survey found that outsourcing will continue to make a big impact over the next three years. Nearly half of respondents believe that between one third and two thirds of brokers will have outsourced in that time; while a further 39 per cent expect the outsourcing level to be around one third. Two thirds believe outsourcing plays a key role in reducing their corporate risk, especially in technical and personnel risk. Their thinking is heading in the right direction, for the US model has seen outsourcing as the dominant form of back office arrangements.

On top of this, as another competitive reform, we need rationalisation of Australia's settlement systems. We have a different one for each of equities, options, futures and bonds. Investors are rightly frustrated by this multiplicity. Our survey found 93 per cent of the industry believe that rationalisation of Australia's varied settlement systems will happen. Of them, 15 per cent thought it vital and inevitable, 37 per cent chose important and probable and 41 per cent thought it would be useful. The question is: how soon?

The recent merger of the Sydney Futures Exchange (SFE) and Austraclear (clearing mainly futures and bonds respectively) is perhaps the first step down this rationalisation path.

Key ASX reforms over the last few years have moved us in the right direction. For example, the introduction of Third Party Clearing (TPC) has created new categories of broker and increased flexibility. Again, this follows the success of the US model. Moves like this reduce the burden of establishing and maintaining back office, freeing brokers up to specialise and provide good customer service.

Investors have greater choice of broker since TPC has been introduced, with more boutique brokers in the market. The irony here is that smaller brokers, having outsourced back office computer needs, might be better placed than larger brokers to handle speedier trades.

Now that we know global markets are well on the way, there is an urgency for Australia to at least keep in step, for the risks are that investment business (advice, buying and selling, transaction processing) could move offshore.

Julian Smith is the joint managing director of Australian Clearing Services.