Chi-X Australia makes first steps toward critical mass

Trading volumes on Chi-X Australia are expected to continue to grow steadily in the coming months, following a successful start that has seen its market share climb to 1.47% as at 15 November.
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Trading volumes on Chi-X Australia are expected to continue to grow steadily in the coming months, following a successful start that has seen its market share climb to 1.47% as at 15 November.

Chi-X Australia reported traded value of US$53.17 million as at 15 November, while number of trades amounted to 15,334. On the same day, the Australian Securities Exchange (ASX) traded US$3.56 billion worth of Australian equities across 537,033 trades.

Emma Quinn, head of Asia Pacific trading at AllianceBernstein in Sydney, said, “Once Chi-X’s market share gets to a critical point, and 5% is probably about that level, then you will start to get a lot of quantitative funds and buy-side firms start to look at trading there. You will see the market share increase over the next few months as people get more comfortable. The market had expected Chi-X to have a slow start and once people start to feel more comfortable with the technology, you will see more orders going there.”

Owned by market operator and trading technology provider Chi-X Global, Chi-X Australia soft-launched on 31 October and traded a total of A$3.84 million across the six stocks available on the first day. On 9 November, it extended its stock universe to include all S&P/ASX 200 component stocks and ASX-listed exchange-traded funds. It has not had any technical glitches so far.

The threat of competition has already led to a series of changes at the ASX, including a reduction in execution fees, from 0.28 basis points to 0.15 bps, new order types and order books, a faster trading platform and a wider range of co-location services.

Additional challenges that the new platform must overcome in its battle for market share include standardised tick sizes in Australia, which limits Chi-X’s ability to offer narrower spreads, and a A$20,000 limit for all orders executed via Chi-X Australia’s hidden order type, which does not apply to Centre Point, the dark trading service offered by the ASX. Chi-X’s hidden order type is integrated with its lit order book, offering participants access to a wider range of liquidity compared to CentrePoint, which operates as a standalone service.

As a result of the ASX’s changes, the average implementation shortfall cost for buy-side firms trading Australian shares has fallen in the past two years by 28%, giving Australia the lowest IS trading costs of all Asia Pacific markets.

Although Chi-X Australia has adopted differentiated pricing for providers and users of liquidity, via a maker-taker model, it will not be offering rebates. Chi-X Australia will be charging 0.06 bps for providing liquidity and 0.12bps for taking liquidity.

Quinn added, “For us, it’s about making sure that we’re getting best execution for our clients by implementing comprehensive trade cost analysis and making sure that we’re on top of all these developments.” Buy-side firms are now looking to connect to all available pools of liquidity in Australia via the smart order routers (SORs) being introduced by brokers, she added. “We’ve had a global process in place for evaluating SORs for many years. So our cost should be lower than the local fund manager who hasn’t had that experience.”

Brokers and technology vendors have responded quickly to the launch of Chi-X Australia by providing access to the new venue. UBS, one of around 20 Chi-X Australia launch participants, has announced the addition of the venue to its best execution policy and smart order router. The investment bank’s SOR now seeks the best price for given securities across ASX Trade, ASX Centre Point, its own internal crossing engine UBS PIN, as well as Chi-X Australia. Clients have the opportunity to switch off routing capabilities to Chi-X Australia if required. Bank of America Merrill Lynch, one of a number of recent investors in Chi-X Global, has also tuned its SOR for routing to Chi-X Australia.

A new research paper from agency broker Instinet titled ‘From Canada with love’ looks the factors Australian buy-side traders should consider when selecting their SORs. For marketable orders, the paper says number of venue connections a SOR has and the routing methodology, i.e. are orders sent to all venues at once or serially, should be the primary factors the buy-side should examine. For limit orders, the issues buy-side traders should think about are how the SOR posts liquidity and whether valuable sources of liquidity are being missed and whether the router responds to real-time market conditions by amending order parameters after they have been posted.

“SORs are the nuts and bolts of execution and are the intermediary between the trader and the trading venues,” wrote Alison Crosthwait, director of global trading research at Instinet and author of the research note. “A SOR that doesn’t protect your interests directly impacts trading performance.”

Meanwhile, trading technology provider SunGard has completed certification testing with Chi-X Australia to offer its Valdi suite of trading and order management tools to market participants.

Chi-X Global is majority owned by Instinet, the agency broker subsidiary of Japan’s Nomura. Investment banks Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley and electronic market makers QuantLab and GETCO recently acquired minority stakes in Chi-X Global.

Author: Jill Wong