Industry News
Recent News - Changes to Electronic Trading Methods in the Australian Equity Trading Market
Australia's financial markets are set to experience significant change. As always, change brings opportunities and risks.
June 4th, 2010
With change also comes challenge. Developments in the world of equity trading and the global stock exchange market have seen remarkable reforms in the last 5-10 years, and dramatic changes in the last 3-5 years. And in the context of competition for market services in Australia, there are challenges aplenty for government, regulators, exchange operators, market participants and investors.
Introducing competition has been said to be part of the government's plans to make Australia a financial services hub. This means there will be more than one stock exchange in Australia fighting for the business of Australia's investors.
ASX will transfer the responsibility for market supervision to the Australian Securities and Investments Commission (ASIC). The transition of regulatory power is due to be completed in August 2010.
While the new market supervisor and regulator draws up its integrity rules, the federal government has approved Chi-X as the first market operator to compete against the Australian Securities Exchange monopoly. Beating rival market operators Liquidnet and a New Zealand-led conglomerate, Chi-X has been given an ''in principal'' licence to trade listed shares in Australia. However, it will have to wait until the Australian Securities and Investments Commission had settled into its new supervisory role before opening. Chi-X is owned by Chi-X global, which operates markets across Europe, Canada, the United States and Korea. It is a subsidiary of Instinet, which in turn is owned by Japanese company Nomura.
Chi-X has been doing the rounds of the major investment banks and stockbrokers and has said it expects to offer trading fees more than 25 per cent cheaper than ASX, according to one recent announcement. Chi-X has been planning a "soft launch" in the last quarter of 2010 with a full-scale launch in 2011, assuming it is granted a full licence by the minister.
ASX has enjoyed an effective monopoly on share trading and an actual monopoly on trade clearing for most of a century. ASX has a raft of new developments in the pipeline, including a totally new trading platform, ASXTrade, slated to go live on November 8. Before that, ASX will unveil a number of execution choices aimed at big-volume traders, starting on June 28 with VolumeMatch, CentrePoint, Undisclosed Orders and Centrepoint Crossing.
A system called PureMatch aimed specifically at algorithmic traders, who are already operating in a small way in Australia, will go live in mid-2011. The third system is TradeMatch, an ultra-low latency, high capacity, trading platform that will provide a full functionality trade execution offering for all ASX-quoted securities.
ASX also cut other fees recently, particularly the fees for on-market and off-market crossings of parcels of shares, an area in which Chi-X specialises in offshore markets. Both were cut by 33 per cent.
Read the Stockbrokers Association of Australia Announcement
ASX to transfer the responsibility for market supervision to ASIC
The transfer of regulatory power to ASIC is part of the process to adopt to changes in market supervision and move to a more competitive framework. From a structural point of view one of the major differences is that timeframes come down.
The ASX Operating Rules have been split. ASIC will be responsible for Market Integrity Rules (called MIRs). They will cover the key rules that are relevant to market integrity, as distinct from market operational efficiency.
ASIC will consult with the market, and particularly the broker community, about how competition will be introduced and the basis for the introduction of competition for trading in ASX listed shares.
ASIC understand consultation needs to occur recognising the experience of other markets where competition between trading venues is commonplace. Competition has resulted in significant innovation, greater and deeper liquidity and tighter bid/ask spreads. They expect the introduction of competition to improve the efficiency of Australia's capital markets too.
First, ASIC say, we will need new market integrity rules to cover the interplay of multiple markets. What is the "best execution" rule - in other words what is the obligation of a broker to find the best trading outcome for their client across all markets? To do this, the market needs price information. What are the obligations to disclose orders and trades to the market? What should be our approach to so-called "dark pools"? Fragmentation of trading can affect price discovery and our rules need to be conscious of that.
Once we publish our rules, then the ASX will need to revisit its rules. New licence applicants, namely Chi-X at this point, will need to finalise its rules and complete its licence application. It will need to finalise its clearing and settlement arrangements. At that point, we will be able to make recommendations to the Minister regarding the grant of the licence. In doing so, we will have to consider market readiness. ASIC acknowledge Brokers will have a lot of work to do to get ready and have identified three key elements. First, and perhaps most costly, are the IT systems that enable brokers to see and trade across all markets.
The competing markets will also need to have some protocols for handling events and to test their systems for interconnectedness. This will be critical to minimise systemic risk. Of course ASIC too will need to manage its surveillance systems to look at the multiple market scenarios.
Secondly, brokers will need to develop new processes for dealing with clients. Their disclosures about their trading practices and how they will fulfil obligations such as best execution will be important. Finally, brokers will need to train their staff to deal with these changes. These developments will be critical to protect investors.
Stockbrokers Association of Australia Announcement
The Challenges of a Multiple Market Environment
May 2010 Newsletter
We are at a highly significant point in the evolution of Australia's securities market, and this month I wanted to draw members' attention to some of the significant changes that are being implemented, or are in the course of being decided, that will impact on the way listed equities are traded in Australia.
Everyone would be aware of the Government's decision on 31 March 2010 to allow for competition in the provision of market services, and its approval in principle of the application by Chi-X to conduct an alternative exchange to that provided by ASX.
To lay the groundwork to make additional markets possible, the Government has transferred the supervision of market conduct from ASX to ASIC. ASIC is making strong progress to meet the very tight timetable which has been set for it to assume control of market supervision during Q3 2010.
These changes however are only the beginning. They herald the start in what should prove to be a significant transformation in the landscape for trading listed securities in Australia. The Australian markets will soon more closely resemble those of the US and Europe, where a combination of rapid technological change and competition has created a trading landscape radically different to that which we have become used to in Australia. It is vitally important that brokers in Australia keep themselves up to date with the changes that are taking place so that they can adapt their businesses as needed.