It's a tough time to be an Asian stock exchange. A new study by Celent finds all of them suffering lower trading volumes, lower margins and reduced profits as a result of the global financial crisis and the introduction of alternative trading systems -- at a time when new regulations and risk management issues are likely to impose additional challenges.

Exchanges are, however, finding a variety of ways to maintain their position, and in many ways, may be in a better position than counterparts in Europe and America to grow.

On average, Asian exchanges enjoyed robust growth in the years before the crisis, with an almost 30% compound annual growth rate in revenues from 2005 through 2007. But in 2008 this reversed: for example, Singapore's exchange saw net profit down 40% in the first three quarters of 2008; Hong Kong's exchange saw revenues fall by 10% and profits down 17% in 2008. The news is similar for others in the region.

These declines are due to the lack of listings and steep declines in both cash and derivative trading. These had a knock-on effect on other revenue-generating services offered by exchanges, including clearing and information products.

Celent reckons these losses are not going to be easily reversed in 2009. Exchanges are relying more on new initiatives to maintain their quasi-monopolistic positions and their profitability.

These include trying to attract cross-border listings in emerging markets, going head-to-head with the likes of NYSE, Nasdaq and the London Stock Exchange. The Korea Exchange, for example, has entered into equity stakes in the new bourses of Laos and Cambodia, partly in order to get new companies there to cross-list in Seoul. Singapore's exchange has a partnership with the provincial government of Fujian to attract its companies. Hong Kong and Shanghai have signed a number of collaborative measures.

Trading is the biggest revenue generator, and has come under pressure from the rise of alternative systems such as Instinet and Liquidnet, and from the promotion of dark pools by broker dealers or the likes of ITG.

However, in Asia, such alternatives do not threaten exchanges as they have done in the United States, in part because Asian bourses enjoy monopolistic positions among fragmented, less liquid markets. This has prevented alternatives from being able to undercut the exchanges on pricing or service, despite the anonymity they offer. In Hong Kong, alternative platforms actually operate as members of the exchange.

Only in Japan is there a true alternative market, with 2% of all electronic trading executed on true off-exchange platforms, and crossing networks are popular.

Nonetheless the exchanges can't be complacent, and are improving their products and their pricing. This includes upgrading their systems to be faster and accommodate more trades, and improving their market-data services. Singapore is working to attract more algorithmic traders, both through operational improvements and perhaps fee cuts. Korea Exchange's introduction last year of KoreaCross, a VWAP anonymous electronic platform for local and international institutional investors, will also spur block trading. Taiwan is taking similar action.

Other important initiatives that are sweeping the region are the development of derivatives trading and cross-border initiatives.

With regulation likely to encourage the OTC derivatives market to move onto an exchange, exchanges are trying to develop products that are standardised and easy to use, but also provide the benefits of OTC trades. For example, Korea Exchange has begun a market-making scheme to provide liquidity to 10-year Korea treasury bond futures. It has also allowed Eurex to list, trade and clear daily futures on Kospi 200 options worldwide after Korean trading hours.

Southeast Asia has seen five nations form an Asean electronic trading link, which should allow investors in their markets to trade regional securities through local brokers. Other examples of international initiatives include the Tokyo Stock Exchange taking a 5% stake in SGX in 2007, as part of a plan to give Tokyo access to superior technology.

The next most active area for growth is in product development, with Islamic products at the forefront. The idea is to attract investment from the Middle East. Last year, SGX listed Singapore's first sharia-compliant ETF covering 100 eligible Japanese companies. Carbon emission products are also expected to grow, with Japanese bourses at the forefront.

Taken together, these and other initiatives should be enough to keep Asia's exchanges on the path to growth, thanks to the region's strong economic fundamentals and GDP growth prospects.