ASIC reports on Chi-X Australia, urges tech focus

Chi-X Australia must strengthen conflicts of interest and technology protections but has satisfied its regulatory demands, the Australian market watchdog concluded in a report.

Chi-X Australia must strengthen conflicts of interest and technology protections but has satisfied its regulatory demands so far, the Australian market watchdog concluded in a report.

The report, published today by the Australian Securities and Investments Commission (ASIC), looked at the exchange’s operations between 4 May 2011 and 31 March 2012 and suggested nine points the firm needed to work on despite meeting its statutory obligations.

In particular, ASIC stated the relationship between Chi-X Australia owner Instinet, which was in part owned by global investment bank Nomura, should be clearly separated.

“We believe that Chi-X could further enhance its conflict handling arrangements by establishing a section on its public website to clearly outline its framework and processes for managing its actual or perceived conflicts of interest,” the publication, titled 'Market report: Chi-X Australia', stated.

In consultation with the regulator, Chi-X Australia has already established a conflicts register to record actual and potential conflicts of interest. The report also noted Chi-X’s non-executive director was a Chairman of broker E.L & C. Baillieu Stockbroking when it was admitted as a Chi-X market participant. Although the chairman was not directly involved in the approval process, ASIC stated the exchange should increase transparency around such possible conflicts of interest.

Technology focus

The second major area ASIC was concerned about involved technological provisions regarding electronic trading, as market infrastructure technology and cyber crime posed increasingly dangerous threats to venues.

“The sufficiency of a market licensee’s technological resources, including a licensee’s arrangements for ensuring systems integrity and security against online attacks, will continue to be one of the key focus areas of our assessments in the foreseeable future,” the report read.

ASIC cited a fault by the trading venue in May concerning a change in software that caused an order type to malfunction. Hidden orders submitted to the Chi-X market were required to have a minimum order value of $20,000, but the threshold was accidentally reset to zero. Although the incident was rectified and details sent to ASIC, the regulator said such events showed the need for prudential monitoring of trading technology.

Chi-X Australia celebrated its first anniversary on 31 October as the first venue to compete again the incumbent Australian Securities Exchange and recorded a day peak in market share of 12.4% on 22 November, according to its own figures.

The venue’s continued growth, which has led to trading turnover of A$17 billion for its first year of operation. Chi-X Australia first announced it’s intention to launch in February 2008 but was stalled by the financial crisis of 2008 and the need to change rules in Australia to accommodate a competitive marketplace.