Australian Exchange Plans High-Frequency Equities Venue to Counter Chi-X

ASX Ltd. (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 computerized strategies dominate U.S. 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.

Modernization 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 Inc. to set up a competing exchange. ASX agreed in October to be acquired by Singapore Exchange Ltd. (SGX), run by Chief Executive Officer Magnus Bocker, who oversaw Nasdaq OMX Group Inc.’s European expansion after an acquisition spree in the 2000s as head of OMX AB.

“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 Ltd., which manages about $1 billion. “The status quo of having a monopoly exchange environment is suboptimal in terms of pricing for participants.”

Chi-X Global, owned by Tokyo-based Nomura Holdings Inc. (8604), aims to capture as much as 10 percent 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 Oct. 1, Fowler said.

Market Value Surges

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 percent 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 percent of American share volume, penetration has been lower in countries where exchanges face less competition.

High Frequency

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 percent of the exchange’s revenue from trading, according to Murphy.

“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.”

Single Market

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 license in 2008, Chi-X Global has introduced markets in Singapore and Japan. It operates one in Canada that captured 9 percent of equity trading last year, according to that country’s regulator.

“Australia is quite important,” Fowler said, adding that high-frequency firms based in the U.S. have expressed an interest in Australia. “It punches above its weight in terms of capital markets. In language, law and other respects, it’s also an easy country for people to connect to and trade into.”

Broker Clients

About a dozen brokers are likely to be connected to Chi-X when it begins trading later this year, Fowler said. More than 90 percent of business may initially come from domestic brokers, with trading from foreign companies eventually increasing, he said. The venue will also compete with ASX by allowing brokers to report pre-arranged trades to its market.

Traders base decisions on where to send orders partly on the standards for handling them that each venue maintains. Like ASX, Chi-X will match publicly displayed buy and sell equity requests at the same price in the order they are submitted, using a trading model known as limit order book.

Chi-X also plans to employ maker-taker pricing, used in the U.S. for more than a decade, in which markets pay firms to provide bids and offers and charge others to trade against them.

ASX urged Australian regulators in January to ban the maker-taker standard, saying it distorts pricing, offers incentives to one side of the trade and may spur an “explosion” of high-frequency business. ASX, which hasn’t decided on the type of fees to apply on PureMatch, may turn to market makers to attract orders, Murphy said. The exchange uses market makers for options and exchange-traded funds.

Anonymous Platform

ASX began an anonymous platform for block equity trades last year called VolumeMatch and another that executes orders at the midpoint of the best bid and offer. It also moved to a new trading platform called ASX Trade, based on New York-based Nasdaq OMX Group Inc. (NDAQ)’s Genium Inet technology. The Singapore exchange is also switching to a new trading platform powered by Nasdaq OMX’s system in August.

The Australian exchange operator expects to complete a data center later this year to house its technology infrastructure and expand the use of co-location, in which customers place servers near the engines that match buy and sell orders, Murphy said. The setup allows firms to reduce the time it takes to receive an execution or confirm their order was canceled.

ASX will be able to accommodate up to 300 racks for customers’ computers, up from about 70 now, he said.

ASX is “becoming more commercial ahead of the inevitable competition about to hit the market and is trying to engender customer loyalty ahead of changes,” Schroeders said.

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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