Momentum needed for a Middle East stock market alliance

Last month, the Stock Exchange of Thailand joined the Asean Trading Link, an alliance comprising three exchanges in South East Asia. The Russian exchanges Micex and RTS completed their tie-up last year to form the Moscow Exchange.

More recently, the Tokyo Stock Exchange and Osaka Securities Exchange announced their imminent merger, expected to be complete on January 1.

These events have brought the debate regarding consolidating the Middle East's own exchanges into sharper focus.

Trading across multiple markets is commonplace across the globe, but this practice is yet to become a reality here. Why?

Although there have been major steps forward in terms of the technology used by Middle Eastern exchanges and the participant financial institutions, a perception of complexity remains around cross-border trading, deterring many people from even trying.

The exchanges themselves remain relatively small, difficult to access, and subject to regulation at the national levels. As a result, capital markets in the Middle East still remain largely underdeveloped relative to other regions.

Over the past few years, we have seen multiple alliances in other parts of the world come to fruition. As well as Asean, there is Euronext in western Europe, Ceeseg (Central and Eastern Europe Stock Exchange Group), and Mila (Mercado Integrado Latinoamericano) in South America. Furthermore, we have also witnessed various new partnerships and memorandums of understanding between exchanges worldwide.

The advantages of interconnectivity are clear: as well as creating more competition and greater foreign participation in these markets, consolidation offers a deeper pool of liquidity and greater appeal for companies looking at exchange listings as an alternative source of funding to bank credit lines or bond financing. In the case of Mila, it became obvious very quickly that 1+1+1=4.

Linking the Chilean, Colombian and Peruvian exchanges created a large amount of goodwill because the sum of the constituents is greater than its parts.

Investors who previously might have shied away from spending the resources required to look at investing in one small market, will now make that investment if they can access multiple markets at once and with greater ease. That reality and ease of access also brings new sources of funds as well as growth opportunities to businesses and institutions within each member country.

Four conditions need to be met to get an exchange alliance to work effectively. The first is a political superstructure, which can develop in different ways. In the case of Mila and Asean, there was an existing structure created to facilitate and promote the interaction of the different countries. The Asean Stock Exchange linkage initiative, for example, leverages the Association of Southeast Asian Nations political alliance superstructure, while the Euronext and Ceeseg alliances operate under the single market promoted by the European Union.

The Middle East already has such a superstructure with the GCC, connecting the UAE, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait. This structure could bring exchanges closer together and promote the formal link-up of the region's capital markets.

Even with a political structure, the second required element is a strong and persistent political will. In Europe, the EU provided the structure and initial momentum, so when the Amsterdam, Brussels and Paris exchanges announced their plans to create Euronext, the idea resonated with the political will and desire of that time.

In any alliance, a larger player often takes the helm and may have to cajole the others past the finishing line, which works as long as these other participants can clearly see the benefits.

As with a political alliance such as the GCC, each country may be in a different stage of development but must realise the combined interests in working together.

The next hurdle - and probably the biggest - is the different regulatory environments among Middle Eastern markets.

But if you do not start somewhere, the issues will never be addressed. A regional exchange alliance can create the momentum needed to kick-start that process, as was proved in the Mila and Euronext countries.

The final condition is the use of the right technology. Although the Middle East is large and therefore not without its infrastructure challenges, Asean provides some clues for overcoming them.

It shows how to link these markets, demonstrating that you can build a network among exchanges without losing each player's national identity, trading platform or connection to their individual investor communities, while at the same time leveraging each participant's own strengths and creating a new, regional synergy.

Each country in the Middle East is trying to develop national industries and national psyches beyond oil extraction or mineral exploitation. A properly functioning capital market is a key piece of that development.

I am certain we will see initiatives that will eventually create links between these markets. It is primarily a matter of developing the political will and then creating the momentum - the rest may just fall into place.

Philippe Carré is the global head of connectivity at SunGard's capital markets business.