Trading places the nuts and bolts of Australia market competition

Post on: 2011-11-02 By: admin

(This article was first published on Thomson Reuters Accelus, a
leading provider of connected risk and compliance information
and online solutions to the global financial services community.
accelus.thomsonreuters.com)
By Nathan Lynch and Wietske Jarvis-Blees
SYDNEY, Oct 31 (Thomson Reuters Accelus) - This morning,
after more than four-and-a-half years of regulatory limbo,
market competition arrived in Australia. Chi-X Australia has
kicked off its six-day "soft launch", offering trading in eight
securities listed on the Australian Securities Exchange (ASX:ASX.AX).
A total of 22 brokers have signed up for the soft launch,
lured by the promise of new orders types, the potential for
lower costs and - ultimately - a sense that competition will be
good for the domestic markets.
But what exactly does the introduction of competition mean
in practice for market participants?
Based on initial sign-ups and positive comments from industry
associations, the Australian financial services sector appears
to be optimistic about the arrival of a competitor for the ASX.
The 22 trading participants and five market data vendors
that have signed up to the platform during the soft-launch is a
stronger start than Chi-X has had in any other market -
including Europe and Japan.
The soft-launch period will run through two clearing cycles,
until November 7. If that goes according to plan Chi-X expects
to give the market 24 hours notice and kick off full trading on
Wednesday November 9.
During the pre-launch period trading on Chi-X will be
limited to six of the most liquid stocks - BHP Billiton, CSL
Limited, Leighton Holdings, Origin Energy, QBE Insurance and
Woolworths - and two exchange-traded funds: the SPDR 200 Fund
and iShares Small Ordinaries.
During the soft launch phase the Australian Securities and
Investments Commission will be monitoring trading activity and
making a decision on whether Chi-X is ready for full-scale
trading. If the soft launch receives ASIC's approval, trading on
Chi-X will then be extended to all S&P/ASX 200 component
securities and ASX-listed ETFs.
Jason Keady, director of markets and operations at Chi-X,
said the new operator would be working closely with ASIC to
ensure it is ready to roll out a full-scale launch.
"At the end of the two settlement cycles, we will make an
assessment to ensure that all the systems are operating as
expected. Assuming all is in order, we will then move to trade
the full range of S&P/ASX 200 securities and ETFs available,"
Keady told Thomson Reuters.
Keady said that Chi-X was already sitting on "quite a
lengthy list" of phase two applicants, which had missed out on
participating in the soft launch. He said the onboarding of
these brokers would be assessed at the end of a two-week
"operational lockdown" period that Chi-X had put in place
voluntarily.
"From an operational perspective we will be locking down our
procedures for the first couple of weeks. At the end of that
period, we will make an assessment about our ability to on-board
additional participants. There is a lengthy list of additional
applications that have arrived from firms that are very keen to
be involved and we will assess our ability to bring them on at
the end of those two weeks," Keady said.
For brokers that want to join Chi-X the process is
relatively simple, according to Peter Fowler, chief operating
officer. Fowler said brokers would need to lodge an application
with Chi-X and provide a significant amount of information on
their business models, systems and compliance processes. He said
that for most firms this information would be readily available,
however, as it is very similar to what the ASX requests from
market participants.
If the information is "in good shape" then the onboarding
process should take around two or three weeks.
Once an application is approved, the applicant needs to go
through a qualification testing phase, to determine whether
their in-house trading systems can connect properly to Chi-X. If
they are running a third-party platform such as IRESS then the
broker will use the qualification certificate that the provider
has already obtained.
Participants on the Chi-X market also need to demonstrate
that they have adequate clearing and settlement arrangements in
place. In practice, that would mean that they are a member of
ASX Clear or they have a clearing arrangement with a member of
ASX Clear.
Unlike the ASX, Chi-X does not have a managed network and
there are no application fees or annual membership fees.
"Then they just have to physically connect to our trading
system, or they can co-locate," Fowler said. "It's as simple as
The outage on the ASX last week came as a salutary reminder
to market participants about the need for more than one trading
venue in Australia. For Chi-X, it also came as a timely reminder
of the challenges that market operators face and the
reputational importance of operating a reliable market.
"We'll be on our toes," said Fowler. "Obviously we don't
expect to have problems, but with a new system going in you have
to be alert."
Keady said Chi-X was deliberately looking for a controlled
entrance into the market, with little fanfare and few surprises.
"We are not looking for a 'big bang'. It will be an orderly
process, and we will be monitoring the systems and participants
very closely," Keady said.
"The first few months will also be a period where the
industry is getting used to trading in the new multi-market
environment and changing the way they trade to deliver best
execution for clients. As people become more familiar with the
new trading opportunities and the new technology, such as smart
order routers, we expect to see a gradual increase in activity,"
he added.
For brokers and traders, however, the changes at the front
end will be subtle. Generally the trading screens are configured
so that a trader sees the consolidated market. When traders look
at market depth they see orders on the ASX and Chi-X on a single
screen, with an identifier alongside the order to indicate which
market it is on. They can then drill down to see the order book
for a certain security on either the ASX or on Chi-X.
"They'll be able to go in and have a look behind that
consolidated screen and see the lower level break down,"
One of the critical differences between the ASX and Chi-X
will be the "standing start" approach that the new market
entrant has taken. Chi-X's operating hours run from 10am to
4.12pm and, unlike ASX, the market operates on a day-only,
standing-start basis.
Keady said this approach was taken, in part, to
differentiate Chi-X from the ASX.
"The listing exchanges tend to concentrate liquidity in the
opening and closing auctions. To simply replicate that
functionality on an alternative platform would not provide any
differentiation," Keady said. "Chi-X opens for trading at 10am
and from that moment, traders are able to send orders into the
market."
At the end of each trading day Chi-X will purge all
remaining orders in the system, so that there are no orders
sitting idle overnight.
"This avoids having stale orders in the system and provides
a good safety mechanism. If there was a major crisis in Europe
overnight causing stock prices to shift dramatically the next
day, stale orders that carry over could result in erroneous
On the weekend, just hours before Chi-X's launch, both
Fowler and Keady were in the Chi-X office, reflecting on the
journey that had led them to today's launch. After a
four-year-plus wait, Fowler said the market was keen to see what
competition can offer in the Australian market landscape. He
also said the strong uptake was also a reflection of the time it
had taken to secure a licence and the anticipation that had
built up during the protracted application process.
"The hunger for competition has accumulated over
three-and-a-half years. It's not just the participants, it's
also the vendors - all of the system suppliers the likes of
IRESS, Reuters and Bloomberg," he said.
Essentially though, from here onwards, the success or
otherwise of market competition in Australia will come down to
the appetite of the brokers.
"To have 22 trading participants at launch bodes very well
and we are very pleased to have such widespread industry
support. We have not seen these sorts of numbers on the first
day of any other Chi-X market launch around the world. This type
of scale presents real opportunities for us to build liquidity
and to build it quickly, but how quickly and over what stocks
will be a matter for the brokers," Keady said.
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