The threat of competition alone has already driven equity trading costs in Australia down to the lowest level among developed Asia-Pacific markets – and that’s before the nation’s first alternative trading venue has even been launched.
Agency research brokerage ITG notes the average cost of executing a trade in Australia is about 33 basis points (bp), with Japan second lowest at 38-40bp over the past two rolling quarters. (The average across developed Asia, however, is still about a third higher than in the US and Europe.)
Evidently the country’s primary exchange, the ASX, has had a long lead-time in which to evolve its business model in anticipation of impending competition.
Operator Chi-X Global initially sought a trading licence for its Australian subsidiary over three years ago. Chi-X Australia is set to go live as a lit venue in the fourth quarter of this year.
Permitting competition to the primary exchange necessitated a change in the law, and this has afforded ASX the time to upgrade its technology and introduce its own initiatives to foster more efficient trading for multiple parties, including launching dark trading books ASX Centre Point (standard orders at mid-point) and Volume Match (large block orders). This October, ASX is also set to launch PureMatch, an order book primarily for high-frequency traders.
So what changes likely lie ahead for the country’s trading landscape as Chi-X Australia prepares to make its debut in what is already a rapidly evolving marketplace?
As a lit venue and a price-making platform, Chi-X’s introduction will likely drive down bid-ask spreads further, as has happened in Japan where several alternative venues co-exist including SBI Japannext, Kabu.com and Chi-X Japan.
The drive to increase trading volumes and liquidity – including the proliferation of broker-dealer dark pools – should also see an escalation in the number of high-frequency traders.
But it seems far from certain that the introduction of Chi-X will drive more trading in dark pools. At present about 30% of total trading is executed off the ASX, finds ITG. About half of that is taken up by block crossing and the rest by smaller-value priority crossings.
But it is worth noting that in the more mature North American market, dark-pool trading has still not breached the 30% threshold.
It is liquidity that institutional investors require as they strive to execute large-volume orders without the price moving away from them. And recent moves to aggregate different broker dark pools are clearly a boon for buy-side firms.
“As you see new participants move into the market, including high-frequency firms, the imperative for an institutional investor to have mechanisms to trade in that kind of environment grows,” says Clare Rowsell, head of client relationship management and marketing at ITG.
“So you tend to see an evolution of both competition in the lit market, but also increasing demand for dark liquidity on the institutional side.”
Only recently, agency-only broker Instinet announced it had extended its BLX dark pool to Australian equities. The service, which prices at the mid-point on ASX Centre Point, can aggregate multiple orders from buy- and sell-side participants and consolidate them into block-size trades. It is designed to match passive block traders and algo traders, among others.
“Putting those two styles of investor together into one pool and getting them to threshold where they can interact is a big step for the liquification of the pool,” says Matthew Moore, head of Australian sales at Instinet. “This type of aggregation technology as well as smart order routers [to find best price] is what the buy-side traders are all looking for at the moment.”
He is expecting to see the use of aggregation start to accelerate when Chi-X Australia is launched. “In the lead-up we will see the buy-side getting a handle on what types of fill-rates they are getting from various pools on the street.”
Moore believes post-trade analysis will also start to pick up once Chi-X goes live. He notes that one of its clients in Japan reported it has carried out just 42% of its total trading on the Tokyo Stock Exchange – “lower than people might think”.
Chi-X Australia itself printed a list last week of 15 market participants it says have confirmed their intention to participate in its launch, mostly large international banks including Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Macquarie, Merrill Lynch, Morgan Stanley, Nomura, RBC Capital Markets, RBS and UBS.
Asked how Chi-X Australia’s launch would change the landscape, Jason Keady, its director of markets and operations, says: “The industry support has been very strong and we have taken a step in the right direction with the mix of names we have there.
“We are not expecting to go from zero to 10% market share in a month. We have to build liquidity and critical mass. A key part of achieving that is to deliver tighter spreads, price improvement, opportunities for investors, better quality of service and, over time, more cost effective and efficient ways to trade. We think that is why the industry is embracing what we are doing and why many new firms are coming to the Australian market for the first time.
“I think the pace of change and innovation really accelerates in this sort of environment and we are seeing the early stages of that. It is going to be interesting to watch it unfold over the next 18 months and an exciting stage in the development of Australia's financial market.”