ASX proposes BLOX for high value trades

The Australian Stock Exchange has announced that it will develop a new trading environment called BLOX, aimed at better meeting the needs of stockbrokers and their institutional clients who deal in particularly large buy and sell orders. BLOX comprises two new facilities for large orders (blocks): a proposed trading facility with special features to address the needs of block traders; and a proposed reporting regime that will enhance brokers' ability to facilitate block trades for their clients. Most block trades are completed in what is often referred to as the "upstairs market", a network of trading desks for major brokerage firms and institutional investors that communicate with each other by means of electronic display systems and telephones to match and trade blocks and portfolios outside the central SEATS order book. BLOX is designed to offer participants in the "upstairs market" much greater choice and flexibility in trading, especially with respect to access, anonymity, order disclosure, execution and trade reporting. Electronic Communication Networks (ECNs) are already offering services to participants in the upstairs market. ASX's proposal seeks to build on these developing networks by offering them the opportunity to link to a central, deeper liquidity pool. The test stage of the proposal also involves an Internet-based pilot facility, the first of its kind in the world. The reporting regime is designed to assist brokers who use risk capital to facilitate the movement of large blocks for institutions by giving them the opportunity to unwind their risk position before they report the facilitated trade to the market. ASX intends that BLOX will deliver lower block trading costs and increased block liquidity and, at the same time, complement and enhance liquidity on SEATS, ASX's central order book. Key to ASX's approach is a desire that market participants be actively involved in the development of the market through intensive consultation, and that they be actively involved in a live test of the market in the fourth quarter of 1999. Developments to date have been based upon consultation with market participants, a market research program, a review of other exchanges' activities in meeting the needs of block traders and a review of academic studies. During the testing phase, institutions and brokers who currently participate in the upstairs market will be invited to be involved in a live Internet-based pilot facility, using real orders and trades. As well as testing elements of the proposed system through a live facility, ASX will use a sophisticated market simulation to give brokers and institutional traders an opportunity to work out the best way to structure the new environment. At the same time, a broker and institutional transaction cost study will take place. Before ASX can introduce any long-term solution to the efficiency and cost issues of block trading or conduct a live test of the market, an appropriate regulatory framework must be put in place. This will require the support of the Australian Securities and Investments Commission (ASIC) and non-disallowance of rules by the Treasurer. "Meeting the needs of block traders is a challenge for trading systems worldwide," said ASX Managing Director Richard Humphry. "The innovative use of combined live and simulated test facilities makes ASX's approach leading edge, clearly establishing ASX as a global innovator in its approach to block trading. "ASX will work with ASIC to develop a flexible regulatory framework that supports this level of market innovation." "BLOX is part of ASX's strategic commitment to recognise and respond to the changing needs of all market participants, both large and small," said ASX National Manager Trading and Clearing, Mr Chris Hamilton. "For high value traders, it will form part of a suite of tailored initiatives spanning the dealing process from making the investment decision, through trade execution and on to settlement. At every stage, ASX will be there to support their business."