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A study conducted by Capital Markets Cooperative Research Centre (CMCRC), the Australian independent academic centre for capital market research, has quantified changes to the Australian market since Chi-X opened its doors, and concluded that it has brought net benefits of up to $215M to the local market in its first year of operation.
The study’s lead author, Professor Michael Aitken, CEO of the CMCRC and Professor of Finance at UNSW, said the study looked at how the introduction of competition to the Australian equity market had affected market quality. Applying the mandate of ASIC, namely, that all market design changes must face and pass the tests of efficiency and fairness, the study estimated metrics representing efficiency and integrity before and after the introduction of Chi-X controlling for all other factors know to affect these variables. As part of the work the authors quantify the cost savings arising from reduced costs of trading. Importantly, they then compared these to the additional costs competition had imposed, including increased costs of regulation and the technology costs borne by the trading community connecting to the new centre.
“We have heard a lot from the trading community about the extra tech and regulatory costs they have to bear now, so we were somewhat expecting our results to reflect that,” Professor Aitken said. “However the results demonstrated unequivocally that the industry has saved money overall, even taking into account ASIC’s cost recovery program.”
The paper examines market efficiency by estimating changes in transaction costs and price discovery. “We looked at bid/ask spreads and found that quoted, realised and effective spreads had declined since Chi-X was introduced. The more Chi-X volume goes up, the more these decline which means that as Chi-X gains market share it becomes cheaper overall to trade equities. This has resulted in cost benefits for all investors but particularly those trading the securities jointly traded on the ASX and Chi-X.”
The study also reviewed price discovery mechanisms, and found that they also improved, with standard deviations of price over both the short and medium terms reduced. The team then put the findings through a significant number of robustness tests to ensure findings stood up.
“We looked at the data over a number of time periods, and measured competition as a continuous variable; at threshold level; using a 10-day moving average or contemporaneous market share metric; and measuring spreads in basis points vs absolute terms,” said Professor Aitken. “Our conclusions remained consistent under all scenarios so we are very confident to say that yes, competition has been an unequivocally positive thing for Australia.
Asked about impending moves to bring competition to other areas of the marketplace he said that the expectation for competition in derivatives trading and clearing and settlement would likely have similar benefits to the marketplace but that it was prudent to give the industry some breathing space given the rate of change over the last few years.” However, Professor Aitken points out that competition in Australian markets should not be compared to more highly fragmented markets such as the US. “We have the situation here where we have two primary markets and a number of dark pools, and this level of fragmentation is small compared to the US where there are over 300 different trading venues,” he said. “The benefits we find in this study are consistent with what we’d expect to see from the initial break-up of an effective monopoly. It should not be construed as advocating competition such as the US experiences – that is a completely different scenario.”
For copies of the full study and interviews with Prof. Mike Aitken:
Kristin Westlake, The Continuum Partners
kwestlake@thecontinuumpartners.com +61 416 219 358
About the authors:
Professor Mike Aitken is widely regarded as the most industry-centric academic associated with Australian capital markets. As the founder and former CEO of SIRCA (www.sirca.org.au), he has used his industry affiliations to build and share infrastructure which now underwrites the research activities of 50+ universities across Asia-Pacific.
Working through SMARTS Group (www.smartsgroup.com), he has designed the world's first "off-the-shelf" surveillance software now in use at 40 national exchanges and regulators (including NYSE-Euronext, Nasdaq-OMX, HK Exchanges, the Swiss Exchange, the Singapore Exchange and the Australian Securities Exchange) and 150 brokers across 40 countries.
He leads the research initiatives of the CMCRC which currently includes providing fully outsourced trading services to the securities industry as well as outsourced surveillance technology to the health and general insurance sectors.
Haoming Chen is a PhD student at the University of New South Wales.
Sean Foley is a PhD student at the University of Sydney.
About CMCRC:
The Capital Markets Cooperative Research Centre is a world-leading research organisation that provides thought leadership and break-through technology solutions for capital and health markets (www.cmcrc.com). It is funded equally by the Australian Government, an alliance of University partners and industry partners including regulators, exchanges and market participants across 10 countries. Research is funded from pooled funding and not sponsored by individuals, companies or institutions. To address its prime goal of industry relevance, industry partners have a major role in the research questions the CMCRC addresses. Academics have primary control over the research design and therefore the results.
