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Australia Still Waiting on Trading Venue Competition
November 3, 2008
By early next year, alternative trading systems (ATSs) are expected to bring full-scale competition to Australia, where the Australian Securities Exchange (ASX) has held a monopoly on trading the stocks it lists. But it is a move that regulators have been slow to make, note observers, and target dates have already shifted multiple times.
In July 2007, the Australian Securities and Investments Commission (ASIC) requested industry comment on license applications from AXE ECN and Liquidnet Australia to operate ATSs. About five months later, ASIC proposed new rules that would allow the platforms to open, provided that certain market transparency conditions were met. While the new venues had expected to launch earlier this year, regulators have taken their time reviewing the proposal's cost efficiency, formulating plans for the operation of multiple market centers and weighing the risks of fragmentation. Global financial turmoil has furthered the delays.
An electronic communications network originally projected to roll out in mid-2007, AXE is a joint venture of the New Zealand Exchange, Citigroup, Commonwealth Securities, Credit Suisse, Goldman Sachs JBWere, Macquarie Securities and Merrill Lynch & Co. When ASIC made its November 2007 recommendation, AXE was hoping to open in April or May of this year. Now it is looking at early 2008.
Liquidnet Australia, an affiliate of the New York-based Liquidnet block trading platform for buy-side firms, expects to receive its license later this year or early 2009. While awaiting permission to operate as an independent market, Liquidnet in February began offering limited services to Australian clients through local brokerage partner Macquarie Capital Securities. Meanwhile, New York-based agency brokerage Instinet, a subsidiary of Nomura Holdings, announced earlier this year that it is seeking regulatory approval to add Australia to the Chi-X ATSs it operates in Europe and Canada.
As of May, buy-side firms had traded over AUD$1 billion ($600 million) in Australian securities through Liquidnet Australia, according to the company. Today, 35 domestic clients trade on the platform, as well as 110 global customers, said Sam Macqueen, co-head of Liquidnet Australia. The buy side, said Macqueen, is looking for a way to trade large orders anonymously, which is not allowed under current Australian regulations. "This is exactly the problem that Liquidnet is trying to fix," he said. "Once Liquidnet receives the permit to operate its electronic execution venue, it will be able to offer traders an option to execute large block trades."
Instead of trading a single block of 100,000 shares, ASX traders are chopping up their orders. "They are slicing that into 200 pieces of 500 shares," said Macqueen, "which is essentially what algorithms do."
ASX's monthly trading volumes have been rising, but the average trade size is less than half what it was two years ago, he added. "The average trade size has declined from $30,000 a trade to below $12,500 per trade," Macqueen said. "The rising trade count and contracting trade size indicate greater use of algorithms and direct-market access."
Troublesome Crossing Rules
Brokerages in Australia--and firms like Liquidnet, which trades through established brokers--face restrictions on matching trades on their in-house order books, which are expected to be eased when the market opens up to competition. "The crossing rules are the real reason our model doesn't work in tandem with the ASX," said Macqueen.
Currently, only trades of more than $1 million are allowed to cross away from ASX. Smaller trades have to be matched through the exchange--and have to be listed for at least 10 seconds. If the market moves in that time period, the trade might not go through, explained Macqueen. "International investors often have real trouble understanding if a trade has to be canceled because the market moves and the crossing rules stop it from going through," he said. "These crossing rules have been frustrating a huge number of domestic and offshore investors for many years."
