ASX plans second equities market as door opens for rivals

Experts say competition should be healthy for the Australian market. Photo / Bloomberg

ASX, operator of Australia's stock exchange, plans to open a second equities market aimed at professional speculators to head off competition after regulators effectively ended its monopoly on trading.

PureMatch, a platform for high-frequency traders whose computerised strategies dominate United States markets, will start in the third quarter, said Richard Murphy, general manager for equity markets at Sydney-based ASX.

PureMatch will complement ASX's main market and provide access to the country's 200 most popular securities, he said.

Modernisation is being forced on the country's main bourse after the Australian Securities & Investments Commission cleared a timeline this month that will allow Chi-X Global to set up a competing exchange.

ASX agreed in October to be acquired by Singapore Exchange, run by chief executive Magnus Bocker, who oversaw Nasdaq OMX Group's European expansion after an acquisition spree in the 2000s as head of OMX.

"Provided it's done well and governed properly, competition should be welcomed," said Tim Schroeders, a money manager in Melbourne at Sydney-based Pengana Capital.

"The status quo of having a monopoly exchange environment is sub-optimal in terms of pricing for participants."

Chi-X Global, owned by Tokyo-based Nomura Holdings, aims to capture as much as 10 per cent of equity volume in its first year, said Peter Fowler, the chief operating officer of the Australian subsidiary. Chi-X was cleared to become the first foreign-owned market operator on March 3 after applying in 2008.

The venue may open as early as October 1, Fowler said.

Introducing competition to Australia's market is part of plans by the Labor Government, led by Prime Minister Julia Gillard, to help turn the country into a global financial hub.

The value of Australian stocks has increased to $1.42 trillion from $629.8 billion at the end of 2004, according to data compiled by Bloomberg, as China's growth spurred rallies in energy and mining companies.

More than 35 per cent of ASX's trading comes from investors and brokers outside the country, Murphy said. While overseas investment is growing, the proportion will probably stay about the same because of laws that will boost employer contributions to pension funds, he said.

High-frequency trading is used in strategies from electronic market making to statistical arbitrage and proprietary algorithmic models where speed of execution may be critical to profitability. While it accounts for more than 60 per cent of American share volume, penetration has been lower in countries where exchanges face less competition.

ASX's platform aimed at high-frequency firms will be segregated from its main market, TradeMatch, and have different rules, although traders will have access to both. The venue will ban orders that are hidden from public view, used by institutions to disguise their intentions and considered a nuisance by high-frequency firms.

The top 200 companies provide more than 90 per cent of the exchange's revenue from trading, Murphy said.

"We observed developments in America over the last 10 years and what Mifid has done in Europe," he said, referring to Europe's Markets in Financial Instruments Directive rules for competition among exchanges.

"We've learned the lessons from what worked and what hasn't worked elsewhere around the world.

"You can't have one model that satisfies both high-frequency traders and block traders since they both want fundamentally different things."

Chi-X Australia is betting on a single market that appeals to companies who want quick transactions and are likely to place standing orders to buy and sell equities on its computers, a process known as adding liquidity.

"Success will come from an amalgam of high-frequency traders, retail and institutional orders, where they all play in the same sandpit," Fowler said.

"The mix of trading is a key difference with our market."

Since filing for its Australian licence in 2008, Chi-X Global has introduced markets in Singapore and Japan. It operates one in Canada that captured 9 per cent of equity trading last year, according to that country's regulator.

- BLOOMBERG