Shares in stock exchange operator ASX Ltd (ASX: ASX) climbed to a multi-year high this morning in an auspicious start for its newly-appointed leader Dominic Stevens.
Mr Stevens is the former chief executive of annuities high-flyer Challenger Ltd (ASX: CGF) and has served on the ASX board as an independent non-executive director since 2013. Mr Stevens has also served on several ASX committees and its clearing and settlement boards.
Embarrassingly, the previous head of the securities exchange, Elme Funke Kupper, was forced to resign after being caught up in allegations of an illegal payment made to political officials in Cambodia by Tabcorp (ASX: TAH), while Mr Kuppe was leading the gambling business.
The role leading the securities exchange is one of the most politically charged in Australia, with regulatory and technological change the two key challenges for the new leader and the group's shareholders.
Regulatory Change
Even though it is a public business the ASX still has government imposed limits on foreign ownership largely in an attempt to prevent a foreign takeover that politicians evidently see as against the national interest. A proposed merger with the powerful Singapore stock exchange was previously knocked back by politicians on the basis it was against the national interest, however, it would likely be in shareholders' interests.
Financial exchanges around the world are planning to merge primarily as global capital flows to those offering the most sophisticated products, widest range of asset classes and highest quality investment opportunities. The proposed merger of the London Stock Exchange and Deutsche Borse being designed to compete with the major US exchanges as top quality companies in the future are likely to favour exchanges with the strongest capital flows. Recently, Australia's hottest tech startup Atlasssian, chose to ignore the ASX in what should be a wake up call for Australia's regulators.
The other political hot potato is the monopoly the ASX retains over clearing and settlement services that offer unsurprisingly juicy revenue streams. Rival, Australian exchange operator Chi-X has long lobbied for deregulation of this sector and has been engaged in regular mud slinging with the ASX over several regulatory issues and the quality of its investment offerings.
Mr Stevens is sure to be busy navigating the ASX through the political pressures it faces and given that the poisonous political environment in Australia often makes House of Cards look like Teletubbies he's likely to have his plate full.
Technological Change
This will be critical to the success of the exchange, primarily as new technology offers the potential to offer new products and save on costs. For example offering the ability to trade interests in more overseas stocks and dozens of other new financial products will be critical to the ASX's success.
Elsewhere, the clearing and settlements systems it currently offers through its Clearing House Electronic Subregister System (CHESS) could be blown away by distributed ledger or Blockchain technology. This could lead to real time clearing and settlement, where share sales result in instant cash credits to an investor's account, while purchases would need to be pre-funded to be executed.
The potential to effectively eliminate failed trades via Blockchain or other new technology could save the large clearing and settlement businesses such as the Commonwealth Bank of Australia's (ASX: CBA) Commsec small fortunes and make or break the ASX's future.
Unsurprisingly, the exchange and large banks around the world are already investing heavily in the potential of this new technology.
Foolish takeaway
The ASX has a lot of opportunities and challenges ahead, so sitting on its hands is not an option if it wants to deliver share price growth over the long term. At $49.90 the stock trades on around 23x analysts' estimates for full year earnings per share in the region of $2.20. The estimated yield is 3.9%, although for dividend seekers I feel there may be better options out there given the current uncertain outlook and lofty valuation.
