By Greg Yanco, Kent Rossiter
Australian Securities and Investments Commission’s (ASIC) Greg Yanco tells FIXGlobal how Australian markets are preparing for the future, including the launch of Chi-X Australia.
What are ASIC’s goals for an Australian consolidated tape?
ASIC has consulted with industry in relation to options to consolidate data from all venues. In Consultation Paper 145: Australian equity market structures: proposals (CP145), two options were put forward – a single provider established by tender process or multiple providers provided by ASIC. To this end, respondents overwhelmingly preferred a multiple consolidator model. As we have previously stated in the Response to Submissions on CP145 Australian equity market structure: proposals (REP237), this was based on industry expectation that existing data services can produce the most efficient outcome for users.
Submissions also overwhelmingly supported the proposal that market operators should be obligated to provide information to consolidators on a non-discriminatory basis in order to maintain a level playing field. While ASIC expects that more than one consolidator will emerge in Australia, if it becomes apparent that no industry solution is likely to eventuate to consolidate data from all markets, ASIC may revisit the issue and consider introducing a single consolidator via a public tender process.
Are additional clearing agents needed in Australia?
ASIC is aware that the topic of additional clearing agents in Australia is indeed a timely one. It is currently in discussion between industry representative bodies, ASXClear and RBA (as the regulator in the clearing & settlement space) with ASIC as an observer. Issues have arisen as to both quality and quantity of third party clearers, as ASXClear seeks to significantly increase minimum capital adequacy requirements for clearing participants, in particular third party clearers.
It is an area that ASIC will continue to monitor and a discussion that will be followed with great interest, both inside and outside of ASIC. We look forward to continued frank and candid discussions with the financial industry in this space.
How can smart order routing be most effective?
Smart Order Routers (SORs) will assist market participants in meetingtheir best execution obligations in a multi-market environment. Some participants will use SORs developed by independent service providers and some will build their own systems in-house.
Trading participants will be able to route orders automatically to different venues depending on specified criteria. In a multimarket environment the routing of orders could be split across venues depending on liquidity. In this way, ASIC expects that clients will received a better outcome overall, particularly so for retail clients, who will receive the best price across the markets unless they wish to instruct otherwise (e.g. for an order to be executed with an emphasis on speed, rather than price).
Does ASIC seek to encourage high frequency trading in Australia? If so, under what terms?
ASIC neither encourages nor discourages the practice. High frequency trading is, however, an area that is continuously monitored by ASIC, and we will respond if necessary to ensure that any such activity does not interfere with market integrity and fair, orderly and transparent obligations. In addition, market operator platforms must have adequate and scalable throughput capacity.
In the coming months, ASIC will release a consultation paper (CP) pertaining to the broader enhanced market structure. This CP will discuss, among other things, the issue of market makers in the cash equity products. We look forward to industry feedback to this CP when released in the next few months.
Is fragmentation a concern?
Given the growth in the use of dark pools of liquidity overseas, ASIC has previously stated that it is a trend that may also emerge in Australia, which can lead to fragmentation, in addition to impacting the price formation process on markets.
As highlighted in CP145, price formation may also be undermined by fragmentation of liquidity, and can – as it has overseas – raise liquidity search challenges for market participants. Much like regulators in the US, Canada and Europe are all considering the impact of dark liquidity on price formation, including price volatility and spreads, ASIC will stay abreast of similar issues.
ASIC is similarly concerned about the potential adverse effect of this trend on price formation in Australia. As we indicated in CP145, ASIC proposes to make a measured adjustment to the framework that will minimise the potential for significant fluctuations in pre-trade transparent and dark liquidity.
What role does the FIX Protocolplay in facilitating market connectivity in Australia?
ASIC appreciates that the role of the FIX Protocol in facilitating market connectivity in Australia is predominantly in the client-toparticipant-to-client area. While the ASX platform has a proprietary messaging interface, it does offer a ‘translating’ gateway developed in conjunction with Cameron FIX. ASIC understands that Chi-X will accept FIX. The FIX Protocol will be important in ensuring consistency in the information coming from market operators.
Further to this, ASIC has published an Australian Market Regulation Feed standard which focuses on communication of market and regulatory data from market operators to ASIC’s surveillance systems. More information on this can be found at: www.asic.gov.au/asic/asic.nsf/ byheadline/Australian+Market+Regulation+Feed?openDocument
RCM’s Head of Asia Pacific Trading, Kent Rossiter, comments on the advent of Chi-X Australia. *Interview conducted before the launch of Chi-X Australia.
Chi-X Australia has not launched yet, and since their entry has been so long anticipated, even before obtaining ASIC approval, it has given the ASX time to lower fees and develop a more competitive product suite. Brokers themselves have had plenty of notice to ensure they are ready for the launch. Chi-X Australia will not be able to quote inside the ASX tick size in Australia, so that competitive feature of Chi-X Japan will not be an incentive, but with expected lower pricing, it is a clear advantage to brokers to select Chi-X wherever possible.
Though under the same full market hours as the ASX, there is some expected differentiation in Chi-X continuous trading model regarding the open and close, so this will provide opportunities. However, since Chi-X will be using the ASX clearing and settlement services to begin with, there is a limit to price efficiencies. Additionally, in support of Chi-X take-up, there are probably fewer regulatory hurdles to overcome in Australia; for example, there is no Tender Offer Bid (TOB) restriction as seen in Japan for Australian equity traders to worry about.
One of the biggest results that Chi-X Australia has caused is to shift some of the regulatory oversight of trading from the ASX to ASIC. ASIC has put out a relatively strict best execution policy which should level the playing field and keep Chi-X relevant. This has caused a flurry of brokerage interest to sign up, so much so that there is a decently long waiting list.