Alternative trading venue Chi-X Australia has been granted a trading licence, following the issuance of rules on competition by the Australian Securities and Investments Commission (ASIC), which will come into effect on 31 October 2011.
ASIC, the market regulator, issued its market integrity rules (MIRs) on 29 April, based on a proposed market integrity rule framework it issued on 3 March, having consulted the market from November 2010 to January 2011.
The MIR framework outlines the scope of products and firms affected, pre-trade and post-trade transparency and information publication, best execution rules, order control and cancelling systems and other technical details for market operation and harmonisation.
“Participants wanted a timetable and received one from ASIC on 3 March 2010. On 29 April, ASIC complied with that timetable in delivering a framework that will come into effect on 31 October of this year,” said Michael Somes, head of compliance and regulatory affairs at Chi-X Australia. “That means we have a real date for the commencement of competition in Australia.”
Long awaited launch
Chi-X Australia, plans for which were first revealed in February 2008 by parent firm Chi-X Global, was granted a trading licence in principle in March 2010. However the flash crash on 6 May 2010, which saw the value of the Dow Jones Industrial Average fall 1000 points before rebounding in a single afternoon, triggered fears amongst regulators about systematic risk in rapidly changing markets. ASIC developed the MIRs as a consequence and delayed the licencing of competitors to the Australian Securities Exchange (ASX) until the rules had been established.
Chi-X Global underwent a significant period round of cost-cutting in the intervening period, to attract investors. Four firms, including market maker Getco, and broker Deutsche Bank, are expected to buy stakes in the market operator in Q2 2011.
The market is not without alternative venues today, Somes notes. “Crossing networks exist already, so in that sense we do have multiple competing platforms. What we don’t have is competition between stock exchanges or market operators i.e. lit markets,” he said.
Regulatory delays undermined plans of some competitors before they had a chance to prove themselves. On 14 January 2011, New Zealand Exchange closed operations of its alternative Australian trading venue, AXE-ECN, which was established in 2006 and first applied for its own market licence in 2007.
The combination of a full trading licence, granted on 4 May by Australia's Treasurer, Wayne Swan MP, who recently rejected a proposed merger of the ASX and the Singapore Exchange, and the framework, will allow Chi-X Australia to launch in Q4 as planned.
Chi-X Australia's licence allows it operate a market in Australia in ASX-quoted equity market products, using a maker-taker pricing model. It will not be able to compete for listings with ASX, meaning issuers will continue to deal solely with the ASX in relation to listing rules and disclosure obligations.
The venue intends to go live with a small subset of the most liquid securities quoted on ASX for on-market trading and will then gradually expand to offer trading in the remaining stocks in the S&P/ASX200 index and exchange traded funds.
The next steps
With the framework for competition now set up for later in the year, the regulator still has work to do on the rest of the market notes Somes. “ASIC has regulated pre-trade transparency but hasn’t yet provided closure on what it wants to do in that space. So we don’t yet know how off-exchange execution may take place in the long run,” he said.
The regulator notes in the MIR document that after consulting on the introduction of a minimum size threshold, below which all orders should be pre-trade transparent, it has decided to undertake further consultation, considering initial responses, with the aim of setting revised rules in early 2012. “In the interim, we have introduced a threshold set to zero. This will enable us to quickly respond if there is a shift of liquidity from the pre-trade transparent markets in the short term at a level that would adversely affect the price formation process,” it said.
There is also a lack of resolution as to which firms will be affected notes Somes. “A difference with European jurisdictions is the coverage of the rules in Australia. They only apply to market operators and participants and, in some specific circumstances, other regulated entities. Whereas in many European jurisdictions market conduct rules apply to everyone, including the buy-side and contracts for difference providers,” he said.
Several other areas have not yet been fully addressed by ASIC. Dark pools, automated trading, DMA, volatility controls, best execution reporting and provision of data to ASIC for surveillance will all be dealt with after further consultation with the industry.
“We can expect the introduction of final rules on pre-trade transparency next year, with volatility controls and evaluation of algorithms and trading systems at the same time,” added Somes.