Singapore and Malaysia are looking to link their stock market by the end of the year so that stocks on both exchanges can be traded and settled. Announced by Malaysia’s Prime Minister Najib Razak in February, the link offers investors in both countries easier access to the two markets, which have a market capitalisation of more than US$1.2 trillion (S$1.58 trillion) and 1,600 public listed companies.

Here, National University of Singapore (NUS) Business School’s Associate Professor Yeo Wee Yong, Assistant Professor Zsuzsa Huszar and Dr Emir Hrnjic share their views on what’s in store for the upcoming system and the possible challenges that need to be addressed.

1) How significant is the announcement by the Monetary Authority of Singapore and Securities Commission of Malaysia to establish a stock market trading link between Bursa Malaysia and Singapore Exchange?

Dr Hrnjic: A stock market trading link between Bursa Malaysia and Singapore Exchange can reduce the transaction costs of cross-border trading. This is significant as it can deepen the markets and lead to improved liquidity and improved price discovery. In turn, the cost of raising funds should go down which would benefit listed companies.

There are successful examples in the region such as the Shanghai-Hong Kong Stock Connect in 2014 and Shenzhen-Hong Kong Connect in 2016. Hong Kong Exchanges and Clearing (HKEX) said that mainland trading through the two links increased from 2.4 percent of the daily trading volume in 2015, to 4 percent in 2016, and 7 percent in 2017. HKEX also revealed that more than US$1 trillion of shares were traded through the two links since their launch. Popular shares include those from banking, consumer and e-commerce firms.

Dr Huszar: In the first nine months of 2017, the Asia Pacific region saw 690 IPOs with US$53.9 billion raised, confirming its position as the world’s most active region for new listings. However, the Singapore Exchange captured only 13 of the IPOs.

In Asia, retail participation generally drives the market, but given the small size of Singapore, the exchange needs to attract investors from abroad. The link between Bursa Malaysia and Singapore Exchange can bring in new investors and improve trading flow.

A/P Yeo: This is not an entirely new idea. Singapore Exchange and Bursa Malaysia have been trying to link up for years.

The devil is always in the details. How significant the trading link will be depends on how different it will be compared to the ASEAN Trading Link that ended last year or the trading link with ASX that ended in 2005. What can this new venture offer that the earlier two can’t?

2) What are the key challenges in implementing such a link?

Dr Hrnjic: We need to look into issues faced by the ASEAN Trading Link. Malaysia’s Securities Commission Chairman Ranjit Ajit Singh said the system had issues such as a convoluted structure, (high?) costs, and trade settlement.

It would be great if both exchanges can apply the lessons from that experiment and address the challenges in the new link.

Dr Huszar: There are issues which the exchanges have to work out. In terms of settlement of security transactions, while both exchanges are on a T+3 system – three days until the transfer of money and security ownership is completed, Singapore Exchange is planning to move towards a faster T+2 process.

The exchanges’ clearing houses will also have to figure out the custodian services – a transparent and secure platform where investors can store their stocks. It may also be a challenge to move shares out of the country and to meet the different reporting 

If exchanges can facilitate dual listings in the relevant currencies, that would make trading much easier for investors. The implementation may not be a big challenge because Singapore Exchange and Bursa Malaysia already have dual currency and multi-currency trading.

A/P Yeo: As far as investors are concerned, the new trading link may make sense if it serves a function that is not met currently. Investors of both sides are already trading the stocks in both markets.

We need to look at the value the new trading link will bring to the table. Can the new system attract new investors who were previously not interested or were not looking to invest in either or both markets? An expanded investor base may then attract more company listings.

Cost could be a good starting point for both exchanges to look at, but how much cost will it save? If we are only talking about a reduction in trading and clearing fee, the costs reduction may not be substantial enough to attract new investors.

3) Both sides say that the link is a step towards encouraging ASEAN to invest in ASEAN and ultimately the hope is that the link can be expanded to cover more exchanges in the region. How realistic is such an expectation?

Dr Huszar: The friendly relationship between the two governments provides a good starting point for further collaboration in the region. With Singapore taking the ASEAN chair this 

year, the link could be an opportunity for the region’s countries to take their partnership to the next level.

A/P Yeo: The original ASEAN Trading Link was supposed to link the ASEAN nations’ seven exchanges by 2015. Only three were on board when the plug was pulled late last year. This experience highlights the difficulty involved in having an ASEAN link. It would need immense will and stamina from the various exchanges and regulators to build a link that is sufficiently attractive to draw the needed interest from market participants.

4) Given what happened to the Central Limit Order Book (Clob) system previously – when some 180,000 Singaporean investors were left in limbo for years after Malaysia banned the trading of its stocks outside the country – will it be a case of once-bitten-twice-shy for Singapore investors?

Dr Hrnjic: The ties between Singapore and Malaysia governments are at an all-time high compared to the 90s when political opposition led to the closure of Clob. Enlightened governments would have learned their lessons. It is unlikely the same thing will happen again.

A/P Yeo: Cross border business dealings always carry additional risks, which will increase when incentives and priorities change. Investors should always be mindful of the risks involved.

Calvin comments:

Note these words

There are successful examples in the region such as the

Shanghai-Hong Kong Stock Connect in 2014 and Shenzhen-

Hong Kong Connect in 2016. Hong Kong Exchanges and

Clearing (HKEX) said that mainland trading through the two

links increased from 2.4 percent of the daily trading volume in

2015, to 4 percent in 2016, and 7 percent in 2017. HKEX also

revealed that more than US$1 trillion of shares were traded

through the two links since their launch. Popular shares include

those from banking, consumer and e-commerce firms.

1) Trading increased

2.4% in 2015

4 % in 2016

7% in 2017

2) More than USD1 Trillions (About Rm3.9 Trilllions) were traded since their launch

3) Popular shares include those from banking, consumer and e-commerce firms. Currently Calvin own Singpost(E-Commerce)  in Singpore

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