Australian market participants have welcomed proposed changes to the structure of financial markets supervision in the country and anticipate an increase in the number of alternative trading venues bidding to compete with Australian Securities Exchange (ASX).
Government officials in Canberra said this week that supervision of market participants would eventually fall under the remit of domestic financial regulator, the Australian Securities and Investment Commission (ASIC), which will take over the role from ASX. The exchange will retain regulatory control over the entities listed on its own market.
The proposed changes are widely seen as the first step to allowing alternative equity trading venues to launch in the Australia, as it removes the potential conflict of interest that arises from being regulated by a rival.
“As part of the drive to improve regulation of the financial industry, the government has decided to transfer supervisory responsibility for Australia’s financial markets to ASIC as it is more appropriate for an agency of the government to perform this important function,” said Chris Bowen, Australia’s minister for financial services, superannuation and corporate law.
The draft legislation process will start next month, with a public consultation expected in December. Final approval is expected in the third quarter of 2010, after ASIC has customised its surveillance system, supplied by SMARTS, to undertake its new responsibilities.
At the moment, three license applications – from AXE-ECN, Chi-X Global and block crossing network Liquidnet – are pending. Andrew Fraser, head of trading at Australian buy-side firm Challenger and head of the Buy-side Traders Advisory Board, an industry body, believes the proposed changes could see further competition emerge soon.
“Some potential entrants may have balked at the prospect of being self-regulated and/or monitored by the ASX,” Fraser told theTRADEnews.com. “Having these functions run from a centralised external agency may be a factor in enticing more applications for market licenses.”
Providers of alternative trading systems have reacted favourably to the reforms and the prospect of competition to the ASX.
“This brings Australia in line with the way markets are regulated in the rest of the world,” said Tony Mackay, chairman of Chi-X Global, the holding company for the Chi-X trading platforms across the world. “The first thing that needs to be done to open the market up to multiple operators is to centralise supervision in this way.”
“Competition and innovation always lead to benefits for the end-investor in terms of efficiency and reduction in cost. This has been proven in the US and Europe already,” added Lee Porter, managing director, Liquidnet Asia.
Having waited around two years for full licenses to be approved, new entrants such as Chi-X and AXE-ECN are expected to ramp up launch plans to coincide with the completion of the legislative process.
“It is taking the maximum amount of time to get this reform passed, but it is important that it is done properly,” said Mackay. “It would be unacceptable to wait until next year to approve our license, so we expect it to be conditional on the new legislation being passed.”
Liquidnet, currently one of a small number of firms operating an alternative trading venue in Australia, is recognised by ASIC as a reporting broker on the ASX. Presently, Liquidnet is required to report all trades to the ASX and as such orders under A$1 million are subject to the exchange’s crossing rules, which effectively expose the order for ten seconds, during which time the market may move.
“The ASX crossing rules have been in place for a long time and don’t suit the current needs of institutional investors,” said Porter. However, he asserts that the ASX rules rarely impact Liquidnet’s trading operations as the venue’s current average trade value is A$1.45 million.
Other firms that offer trading in Australian stocks include BlocSec, a block-trading platform operated from Singapore and owned by broker CLSA, as well as some broker-operated dark pools.
Chi-X Global’s Mackay also expects further clarification in other areas such as best execution as well as non-displayed trading, while Fraser notes that competing venues will only serve to benefit Australian traders.
“Most buy-side firms would agree that there will be an increase in the liquidity of Australian equities should competition finally get the go ahead,” said Fraser.
Changes to the regulatory structure in Australia could also have implications for other countries in the Asia-Pacific region weighing up the benefits of competing equity trading venues.
“Australia has taken a lead role by looking at the effect of competition and a lot of the markets and regulators in the region are looking to see how they would deal with new market entrants,” said Porter. “Asia is the natural next step and what happens in Australia could set the scene for the rest of the region.”