Flash crash concerns hold up ASX competitors

The timetable for introducing competition to the incumbent Australian Securities Exchange may slip to Q1 2011 because of regulatory concerns over a possible repeat of the 6 May flash crash in the US.
By None

The timetable for introducing competition to the incumbent Australian Securities Exchange (ASX) may slip to Q1 2011 because of regulatory concerns over a possible repeat of the 6 May flash crash in the US.

The Australian government proposed changes to the country's securities market regulatory structure in August 2009, to make supervision of market participants the responsibility of domestic financial regulator, the Australian Securities and Investment Commission (ASIC), rather than the ASX.

The switch took place on schedule on 1 August 2010 and was expected to allow trading venue operators such as Chi-X Australia and AXE-ECN to open for business before the end of this year. Financial services minister Chris Bowen announced “in principle” approval of Chi-X Australia market licence application and Chi-X recently confirmed its hopes for regulatory approval in Q4 2010. A spokesperson for AXE-ECN, whose initial backers included Goldman Sachs, Citi, Credit Suisse and the New Zealand Exchange, confirmed that its application for a licence remains active.

But according to sources, the so-called 'flash crash' on 6 May, which temporarily wiped out US$1 trillion of market value off the Dow Jones Industrial Average index, has prompted ASIC to focus on ensuring that its new framework for oversight of trading venues will maintain market stability in the event of an outage or slowdown by one trading platform. On 6 May, alternative trading platforms in the US carried on trading as the New York Stock Exchange went into a ”go-slow' mode. As a result, the process for issuing trading venue licences may be delayed until Q1 2011, when the ASX's new high-frequency platform is due to go live.

In addition, market participants expect greater state involvement in issuing licences as ASIC assumes its market supervision role.

“The government and treasury are likely to keep a close eye on alternative venues that want to set up operations in Australia given that ASIC still has to finalise some aspects of its new supervisory role,” said Sam Macqueen, co-head of block trading venue Liquidnet Australia.

ASIC began a consultation process for developing its market integrity rules in February 2010.

Chi-X Australia and AXE-ECN are currently believed to be the only alternative trading platforms waiting in the wings. Liquidnet, which first applied for its Australian market licence four years ago, has decided to relax its efforts to become a recognised trading venue following changes to the rules governing continuous crossing.

“The repeal of the ten-second rule has meant it is now not imperative for Liquidnet to seek a full markets licence, but we will still wait and see,” added Macqueen. “We are focused on growing our liquidity pool in Australia and Asia instead of pursuing a licence that may not provide us with a material benefit in the short term.”

Agency broker and trading technology provider ITG also provides block-crossing services in Australia, while agency brokerage CLSA also offers trading of Australian equities through its BlocSec dark pool. Chi-East, a joint venture between market centre operator Chi-X Global and the Singapore Exchange, will trade Australian stocks when it launches in Q4.

Dark pools operating in Australia are required to route their trades and report them in real time via an ASX member broker.

The ASX is currently in the process of launching three trading platforms targeted respectively at high-frequency trading, block trading and traditional cash equities business. VolumeMatch, the block trading platform, launched on 28 June, while the other two platforms will be made available during 2011.

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