When exchanges roll out new trading services and reform market structures, they should not fragment liquidity further if they want to succeed, says Richard Atkins, senior manager of trade execution and sales at the Australian Securities Exchange (ASX).
Fragmenting liquidity “would make you part of the problem rather than part of the solution”, said Atkins at the recent Asia-Pacific Fix trading summit in Hong Kong.
Amid increasing competition from alternative trading venues such as Chi-X, ASX has sought to expand its secondary market with the addition of three new platforms since late 2011.
But only one of the three – Centre Point, ASX’s dark venue – has gained decent traction, with 8% of ASX’s executed liquidity. Both Pure Match (aimed at high-frequency traders) and Volume Match (intended for institutional block trading) attracted little volume, and the latter closed as a result.
“The platforms that did not succeed were the ones that further fragmented the market,” Atkins said. “Platforms that draw market liquidity together are the ones that work.”
Liquidity fragmentation is an issue in the US, where there are 13 exchanges and more than 50 alternative venues.
Some observers argue that the diversion of trading volume away from lit exchanges onto dark pools has negatively affected the price formation process on the former, leading to wider bid/ask spreads and increased volatility.
Many Asian exchanges in the past monopolised trading in their domestic markets. The entry of alternative venues such as Chi-X and internal crossing networks run by broker-dealers in recent years pose a threat to Asia’ exchanges, some of which have sought to respond.
Japan Exchange Group has introduced series of reforms over the past few years with the intention of becoming the “preferred exchange in Asia”.
In a three-phase project that began in January this year, the Tokyo Stock Exchange (TSE), will reduce its tick size, which sets the minimum bid/ask spread.
The tick size for all Topix 100 stocks will be reduced on July 22. The tick size of stocks priced below ¥5,000 ($48.80) will drop to below ¥1 for the first time.
The reduction puts TSE on a par with its competitors, such as SBI Japannext, which had touted its narrower spreads.
The tick-size reduction has achieved the TSE’s objective of making the largest market-capitalisation stocks more accessible to average retail investors, said Mark Lee, senior vice president of market business development. The bid/ask spread of most stocks fell by some 60% in the first phase of the reform in January, he added.
However, Australia’s securities regulator has decided against reforming tick sizes after examining markets where tick-size competition exists, as the outcome didn’t look particularly favourable, said Greg Yanco, market and participant supervision senior executive leader at the Australian Securities and Investment Commission.
Asic does not intend to impose structural reform of the whole market, as market operators develop its structure, Yanco said.