Opening Cross: Does SGX-ASX Tie-Up Herald More Consolidation?

Pop quiz: which exchange group currently trades the most options in the US? Not the Chicago Board Options Exchange. Not the International Securities Exchange. Not even NYSE Euronext with its purchases of the American Stock Exchange and Arca. In fact, according to the Options Clearing Corp, it's Nasdaq, with its Nasdaq Options Market and PHLX market.

Nasdaq's 2007 purchase of the Philadelphia Stock Exchange and Board of Trade has proved a smart investment, giving the exchange a cross-asset proposition to rival other exchanges that used mergers and acquisitions to move from equities into related options markets - though one of the world's largest exchange groups, CME, seems content for now to focus on derivatives and not pursue equities exchanges.

But should CME and others be worried? According to the Singapore Exchange and Australian Securities Exchange, which last week announced plans to merge, Asia-Pacific has overtaken the US as the largest region for derivatives trading, based on volumes of derivatives contracts. SGX's takeover of ASX creates the second-largest listings venue in Asia-Pacific, the second-highest concentration of resources companies in the world, and the second-largest value of assets under management, behind the US.

The two will reap $30 million per year in savings, including those related to IT - compared to combined revenues of more than $90 million from information services alone. These savings - and the security of a bigger, diversified business - will come in handy as the exchanges compete for the first time with new entrants to the Asia-Pacific marketplace, which threaten to upset exchanges' largely domestic monopolies. For example, Chi-X-the multilateral trading facility that experienced such success in fragmented pan-European equities following Europe's MiFID regulation - is setting up trading venues in Japan and Australia, as well as its Chi-East dark pool with "more coming soon," according to an ominous warning on its website. Ominous, that is, for other market centers that will have to find new ways to compete for share when they may not be accustomed to competing. ASX was also facing competition from the AXE ECN, a venue backed by the New Zealand Exchange and a consortium of dealers - though its website is so out of date that it doesn't appear an imminent threat.

Though not an indicator of potential future mergers, an interesting pastime is to look at who exchanges choose as their technology engine suppliers. For example, both SGX and ASX use trading platforms from Nasdaq OMX. Exchanges with similar platforms will save a great deal of time and effort when it comes to post-merger systems integration. Also, it might provide an indicator of where their allegiances for the future lie - if the ease of integration is a significant factor, might an acquisitive exchange group be most likely to approach markets that have made similar technology choices, assuming they meet its basic target criteria?

Western exchanges have been keen to strike agreements with Asian exchanges around development of new products - perhaps in the hope that the relationships will develop into something greater over time. Consider also NYSE Technologies' role as technology partner in the pan-ASEAN exchange trading link. The Philippine Stock Exchange recently migrated to a trading platform from NYSE Technologies, while SGX and the Stock Exchange of Thailand use Nasdaq's platform. Could the big exchange groups see these technology agreements as a back-door towards acquisitions in the region?

Though SGX and ASX may have played their hand early, the game's not over, and many more players could either fold or consolidate their pots with the high rollers.