"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Monday, October 17, 2011

Chi-X: Australias Newest Exchange Seeks HFT

It looks as if HFT is here to stay.  The Australians have now enabled a "soft launch" of the Chi-X exchange which is owned by Nomura Holdings.  This exchange currently offers 8 securities to be traded through 22 brokers.  As the size of traded securities grows to include the full S&P/ASX 200 Index, more and more HFT will have a place to call home.  The Chi-X is actively seeking HFT in order to "increase clearing and settlement activity and therefore help to offset some the revenue ASX may lose".  This article from WSJ talks of Guy Debelle from teh Reserve Bank of Australia who discussed HFT in Foreign Exchange markets, which we covered here.  Don't fall for the propaganda.  A damning form of trading is being expanded without the regulators full understanding the implications.  This is the biggest threat to the sanctity of markets and those who are unprepared are going to be whipped off the playing field, leaving those us who are able to trade around the HFT and even at times piggy back on their manipulative nature.  So the low volume, small equity choices, and openness to HFT will make for some very interesting market making in the next 2 weeks and I hope those who read this blog will be protected.

From WSJ:
Australia's securities watchdog gave the all-clear on Monday for Chi-X Australia Pty. Ltd. to begin operating, ending the Australian Securities Exchange's monopoly on share trading in the country and potentially paving the way for other competitors to enter the market.

Chi-X Australia, which is owned by Japanese investment bank Nomura Holdings Inc., can begin operating its exchange on Oct. 31 with a "soft launch" that offers investors the ability to trade in eight securities through 22 brokers, the Australian Securities and Investments Commission said. Within a few weeks of the soft launch, Chi-X expects its trading operations to cover the full S&P/ASX 200 index, a spokesman said.

Earlier this year, Chi-X received a tentative go-ahead from the government to operate as part of a policy to promote competition in the country's financial markets, where the ASX has been the country's only stock exchange. For ASX, the launch of Chi-X has the potential to eat into its trading volumes at a time when equities volumes are light and new stock issuance is low. Should Chi-X be successful, it could attract other competitors into the Australian market.

For the time being, ASX will retain its monopoly on the clearing and settling of trades Australia. Some analysts have said the introduction of a rival broker could boost equities volumes, especially considering Chi-X should attract more high-frequency trading, or HFT, to Australia, which would increase clearing and settlement activity and therefore help offset some of the trading revenue ASX may lose.

Chi-X has invested heavily to attract HFT firms. In HFT trading, firms use supercomputers to make trades in a matter of microseconds, attempting to profit from fleeting moves or price disconnects in markets. The practice, popular among market-makers, Wall Street trading firms, hedge funds and other market participants, was caught in the crosshairs of a U.S. government review of the May 6, 2010 "flash crash" in the U.S. where the Dow Jones Industrial Average lost nearly 1,000 points in a matter of minutes.

In its findings, U.S. regulators said HFT didn't cause the flash crash, but warned that the increasing connectivity of markets through this type of trading exposed the market to several risks, especially during times of instability in trading. The sentiment was echoed by Reserve Bank of Australia Assistant Governor Guy Debelle in a speech last week.

Analysts said equities trading comprises around 5%-6% of ASX's total revenue, so even if Chi-X captures significant market share, it's unlikely to make a major dent in ASX's earnings. ASX has also been benefiting from growth in its derivatives business.

If Chi-X were to move into the clearing and settling business, another 19% of ASX's revenue stream would be under threat, David Spotswood, analyst at Select Equities said. However Mr. Spotswood doesn't expect the Australian government to approve a rival for clearing and settling, especially considering the government cited the ASX's role as the main clearing and settling house for the country in rejecting a proposed merger between the ASX and Singapore Exchange Ltd. earlier this year.

Chi-X has signed a five-year service agreement with ASX on clearing.

The closest firm to erasing ASX's monopoly on clearing and settling is London-based clearing giant LCH. Clearnet, which has the capability to clear Australian securities through Chi-East, hasn't begun the lengthy approval process for stocks, but says it's "keen to explore opportunities in the region".

U.S. clearing giant State Street has ratcheted up its Australian presence in the past year, particularly in the market of custodial services, but executives in Australia say clearing is a long way off.

Meanwhile, the main threat to the ASX is the light volume in equities trading.

"The big issue for ASX is the same issue for Macquarie Bank and AMP, the volume of equity trading is not that strong. Retail trading in stocks is very, very weak," Mr. Spotswood said. "It's never recovered from the boom time levels in terms of people buying and selling shares. The ASX business model is like a big wealth manager, it's a big technology stock, it needs volume and that volume has never really recovered since the global financial crisis."