A new fragmented trading landscape is posing considerable challenges for sell-side firms in Australia. As the country prepares for the launch of new exchange Chi-X Australia, the nation’s sell-side firms will now need to deliver and demonstrate best execution across a dynamic spectrum of lit and dark venues, as well as establish an optimal position in the queue for order flow in accordance with their size and technical capability, according to Steve Grob, director of group strategy at technology provider Fidessa.
“The liquidity landscape gets much more complicated in a multi-market situation. Navigating this new liquidity requires a cycle of continuous investment which can be costly for brokers that are not seeing simultaneous increases in inbound order flow,” Grob said.
In July 2011, the Australian Securities Exchange (ASX) selected Fidessa to provide the software and technology infrastructure for its new smart order routing trading application, ASX Best, which will allow users to route flow between the lit venues of ASX and Chi-X Australia, and ASX dark venues such as VolumeMatch. Upon launch on 31 October, Chi-X Australia will offer market participants an alternative to trading on the ASX. As well as its development of a smart order router with Fidessa, ASX is also in the process of launching three new execution platforms targeted at traditional market participants, block traders and high-frequency traders.
Grob recently authored a white paper, entitled ‘Stuck in the Middle with You? A look at the future for brokers in Australia’s new trading landscape’, which looks at issues raised by new market integrity legislation in Australia.
A new world for the brave
Grob said service providers on the sell-side will find themselves operating in a new ecosystem; every participant will need to find a position in which they can deliver real value, and those that can genuinely help their clients navigate the new Australian trading landscape will prevail.
“We believe there will be a degree of polarisation too as brokers opt for one of two business models: scale or specialization,” he said. “The middle ground in-between is something of a no-man’s land, and those firms that remain there may find life pretty challenging.”
Although the impact of fragmentation offers the bigger players an opportunity to leverage their scale, it can favour smaller firms as well, Grob’s report said. The key to this approach lies in focus and in being ready to outsource to the bigger firms where necessary so as to provide the complete level of service buy-sides will demand.
“However, it does require a significant degree of self-examination and questioning. This includes understanding how the firm adds real competitive edge and how it differentiates itself through research, regional/sector coverage, or its ability to trade orders of a specific size or shape. Having established the business’s focus, smaller firms also need to work out how their strategy will be monetised: how will they get paid?”
Fidessa gears up
Fidessa has opened an office and a hosted data center in Sydney in view of the opportunities that the fast-changing trading landscape in Australia will bring. Heading up Fidessa’s Australian business will be country manager Andrew Metcalfe, who was formerly based in Hong Kong where he headed Fidessa’s Asia Pacific hosted services division. Also joining the Australian operation is James Hardcastle from Fidessa’s Tokyo office, where he was head of international sales for Japan. Hardcastle will lead Fidessa’s Australian sales activities.
The new data centre facilities in Australia will allow Fidessa to provide its full range of low-latency connectivity, Software as a Service (SaaS) solutions and other managed and hosted services locally.
“The Sydney office opening is testament to Fidessa’s commitment to the Australian marketplace, and these new appointments build on the significant work we have been doing in Australia for some time, as well as augmenting the team of 10 people who are already working on secondment on our Australian activities,” Jean-Pierre Baron, managing director of Fidessa’s business across the Asia Pacific region.
Author: Jill Wong