Chi-X's new hit on ASX monopoly

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This was published 13 years ago

Chi-X's new hit on ASX monopoly

By Adele Ferguson

CHI-X, the company set to break the Australian Securities Exchange's monopoly over share trading, is understood to be talking to international clearing houses, including Fortis, about setting up in Australia, in a move that would further smash the ASX's lucrative $180 million-a-year cash market monopoly and cut overall prices.

The talks come as the ASX faces one of its biggest challenges since it listed on the exchange more than a decade ago. Besides the spectre of competition putting pressure on its share price, the ASX is facing an exodus of talent as it manages the transfer of the bulk of its market supervision powers to the Australian Securities and Investments Commission (ASIC).

"The next 12 months will be challenging for the ASX."

"The next 12 months will be challenging for the ASX."

In the past few weeks two senior executives have announced their departure and there is mounting speculation that ASX boss Robert Elstone will leave after his contract expires in July 2011.

A spokesman for the ASX responded to the speculation with the following comment: ''Robert Elstone's term as CEO of the ASX was extended in March 2009 to July 2011, at least.

Nothing further has been said. Any change to that timing will be announced to the market.''

The rumours spread after the ASX appointed a deputy chief executive.

Whatever the case, Elstone, and the rest of the investment community, is about to enter a new era. Managing the introduction of a new trading system - and any teething problems it might entail - along with the imminent arrival of competition following the government's approval ''in principle'' of a licence to Chi-X last month, heralds the rise of dark pools and alternative trading systems that can bring with it more risk and less transparency.

It is no doubt on the Reserve Bank's mind given its mandate to ensure systemic stability. The ASX's clearing house novates all transactions, which effectively guarantees the performance of all trades and reduces counter-party risk.

Wilson HTM analyst Andrew Hills offers a cautionary warning: ''Having studied exchanges for many years, I hope the government knows what it is doing. Retail and institutional shareholders and society in general won't be winners. The real winners will be algorithmic traders and large investments banks.''

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There also appears to be an inconsistency between the approval in principle for Chi-X and regulators requiring the ASX to hold more capital for settlement. In other words, regulators are reducing risk for settlement, and policymakers are increasing risk for execution.

The ASX generates an estimated $60 million a year from trade execution, about $50 million from its clearing house and another $70 million-plus a year from settlements.

After just over two years of operating in Britain, Chi-X has captured almost 30 per cent of all trading in the 100 largest companies in the FTSE Index. Equities income makes up only about 10 per cent of ASX's revenues, so the immediate impact of losing its monopoly is probably slight.

If Fortis or LCH Clearnet decides to tie up with Chi-X so it can offer clearing, the revenue damage to the ASX could get much worse. But it could be a difficult thing to achieve given any would-be entrant needs a licence from the federal government.

Chi-X, which is owned by Instinet, a subsidiary of Japanese broking giant Nomura, operates in Europe, Canada and parts of Asia. In almost every case, it has done a deal with one of the major international clearing and settlement operators. In Europe it uses EMCF, which is jointly owned by Fortis and Nasdaq, and in Asia it uses LCH Clearnet's EquityClear service. Put simply, it can use the one existing clearing and settlement facility if equal and efficient access occurs.

Talks between Chi-X and Fortis are believed to have intensified after the ASX released a paper in December stating it would charge an annual fee of up to $450,000, excluding GST, to rival exchanges.

Chi-X baulked at this upfront annual fee on the basis that it was akin to a supermarket charging a customer an annual fee to enter its store and push business its way.

Financial Services Minister Chris Bowen tried to rekindle the talks by announcing approval in principle of Chi-X's licence, but warned that if the discussions were not fruitful, the government had powers to intervene. Besides the Chi-X application, there are two other applications for market licences from AXE and Liquidnet.

With the spectre of competition, the ASX has announced a new set of products, TradeMatch, PureMatch and VolumeMatch. It is expected to unveil the pricing structure for the new products next month, which in effect will be a pre-emptive pricing response to competition. The new pricing is expected to include a big cut in trading fee rates, partly offset by reductions in rebates.

The next 12 months will be challenging for the ASX as it embraces competition and loses some of its clout following the stripping of most of its supervisory powers.

Stiff competition and threats to revenue streams will no doubt prompt investment bankers to freshen up their files on potential merger opportunities for the ASX. Singapore Exchange, Canada and Hong Kong have previously been mooted. Stockmarket consolidation was interrupted with the global financial crisis, but the time might be right to have another look.

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