Australia's other exchange driving down trading costs
Though many investors are likely unaware, the Australian Securities Exchange (ASX) isn't the only way to trade directly in equities, ETFs, warrants and other securities.
Though many investors are likely unaware, the Australian Securities Exchange (ASX) isn't the only way to trade directly in equities, ETFs, warrants and other securities.
Since launching its Australian operation in 2011--having been founded in Europe in 2007 --Chi-X now provides investors with trading access to around 2,200 listed companies and ETFs. It currently has 47 trading participants, including well-known broking firms CommSec, nabtrade, Westpac Online and ANZ Share Investing.
"One of the main advantages is a mid-point system that reduces execution costs by connecting sellers with institutional buyers.
"Also, just through competition, we now have this concept of a national best bid and offer, so you will get trading on Chi-Xi f there's a better price, and it will happen around the other way as well. With more brokers, more competition and more participants in the market and clients getting better executions," says Chi-X CEO, Vic Jokovic.
Cost savings
Between 2016 and 2017, trade reports indicate fees have fallen around 86 per cent since Chi-X entered the market. Jokovic says its own analysts indicates around $230 million has been saved by investors through some of the new trading methods on Chi-X and competition-driven improvements at the ASX, "which is good for brokers and good for consumers"
The exchange currently has about 800 unique warrants traded on Chi-X and around 35 per cent of all ETFs daily trading volumes. According to Jokovic, Chi-X's participation as a client of ASX has also brought improvements and cost-savings to consumers.
Clearing and settlement charges in Australia are considerably higher than in other markets.
He says this has been exacerbated by a lack of competitors, "the threshold to entry is high, it's not just about regulatory barriers, but also way that settlement and clearing are executed".
Background
After Europe, Chi-X launched next in Japan and Australia, and formed a joint venture in Singapore. "We had the technology, we needed the people and the regulatory approval, which was the most challenging part…regarding the entry of competition into the Australian market, the regulators wanted to make sure we knew what we were doing and that we weren't going to damage the reputation of Australia," says Peter Fowler, a Chi-X board member.
Chi-X and ASX aren't the only two exchanges, with the Sydney Stock Exchange and National Stock Exchange also licensed by the regulator.
"The difference between these and Chi-X and ASX is that Sydney and National are not trading venues, they are listing venues, essentially off-market, a bit more opaque and don't interact with companies that are listed on both ASX and Chi-X.
"Could they gain a license to trade and compete? Perhaps, but it would be an incredibly high bar and a long-road…but I'm sure it's something they've looked at.
"You'd need technology and a platform, in the case of ASX it was 160-year build, and in our case it was an international build…so we think the bar to competition is very high, though I would welcome it, I think it keeps everyone sharp," Jokovic says.
While some people may expect blockchain's distributed ledger technology could be a game-changer in providing an entry point for more potential competitors, Chi-X head of market solutions Mike Aikins disagrees.
"The speed of transactions is not high enough, with the technology more suited to post-trade record-keeping and back-office transactions."
Jokovic is a firm believer in the benefits of competition. "We are both a competitor and a client of the ASX [through its clearing house platform]…we maintain a reasonably collaborative relationship with them, and competition brings innovation."
"When Chi-X came into the market, its big advantage was its modern technology developed in Europe and other markets.
"You can have a dominant exchange for hundreds of years, but dominant technology can change things around quite quickly," he says.
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Glenn Freeman is a senior editor at Morningstar.
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