ASX questions benefits of exchange competition

David Gonski, chairman of the Australian Securities Exchange, has warned that the introduction of competition between trading venues would bring instability to Australia's equity markets.
By None

David Gonski, chairman of the Australian Securities Exchange (ASX), has warned that the introduction of competition between trading venues would bring instability to Australia's equity markets.

In an address to the exchange's 2010 annual meeting, he asserted that “increased volatility and flash crashes are an inevitable consequence of fragmentation.” Gonski also argued that instances of extreme movements in share prices over very short periods, such as occurred during the ”flash crash' in the US on 6 May this year, “have sharpened awareness that increased volatility and risk of market disruption are the prices that long-term investors may have to pay in markets with multiple execution venues”.

National securities market regulatory body the Australian Securities and Investments Commission is expected to

delay granting licences to alternative trading systems because of increased concerns over the risks of competition until Q1 2011. Previously, it was expected that licences would be granted in time for new players to launch operations before the end of this year.

Robert Elstone, managing director and CEO at ASX, also questioned the wisdom of opening up the country's equities market. “The flash crash bears testimony to the downside of market structure complexity,” he said. “Had those events occurred at a quarter-end and flowed into closing unit prices for retirement savings plans, the impact would have been felt beyond the trading community, with genuine savers and investors joining the panic.”

Despite its reservations, ASX has already taken some steps to prepare for competition. These include halving the headline equity market trade execution fee; the launch of three new trade platforms – Volume Match, a block trading service, Trade Match, which caters for ASX's existing product areas such as equities, and a streamlined parallel central limit order book, Pure Match, aimed at high frequency traders; an imminent upgrade to the futures trading platform; and plans to reduce latency to under 500 microseconds with its new ASX Trade platform, supplied by global exchange group Nasdaq OMX expected to launch in November 2010. The exchange has also committed to build a state of the art data centre.

“I believe ASX is well prepared to meet upcoming challenges and to prosper next year and beyond,” said Elstone.

Currently, the main source of competition to the ASX is expected to come from Chi-X Australia, a subsidiary of global trading venue provider Chi-X Global, and AXE ECN, an electronic communications network operated by a consortium including the New Zealand Stock Exchange and a number of brokers, both of which have plans to set up operations in Australia by Q1 2011, following the transfer of regulatory powers from ASX to ASIC on 1 August this year.