It takes two
The Age
Thursday April 1, 2010
NEWS that the Rudd government has granted in-principle approval for Nomura-controlled Chi-X to establish a new sharemarket in Australia in competition with the Australian Securities Exchange throws up twin challenges.First, it exposes the listed incumbent to share price pressure as investors re-rate it to take into account lower pricing power, and lower market share.Share price premiums accorded the London Exchange and the Toronto exchange when they were monopolies have become discounts as new entrants including Chi-X take market share by discounting trading fees.In London, Chi-X has built a 28 per cent market share in three years, and the London Exchange's trading market share has fallen from 100 per cent to about 43 per cent. The Toronto exchange lost its monopoly early in 2008, and Chi-X and other new entrants have taken about a third of the market.The decision also sets a task for the lead market and companies regulator, the Australian Securities and Investments Commission, to produce a new, comprehensive template for market regulation.ASIC issued a consultation paper in February about how it will supervise trading following the government's decision last August to take the job off the ASX (the August decision paved the way for yesterday's one, and Chi-X will not get final approval until the supervisory transfer is complete).But the rule framework that ASIC discusses in the February paper is modelled on the existing rules applied by the ASX, and reflects the monopoly status quo. The proposed rules "do not anticipate competition for market services", ASIC says in the discussion paper, adding, "new rules will be developed and consulted on if competition is to occur".So there's quite a bit of work to be done before Chi-X arrives. The government needs to amend the law to allow competition, and Chi-X needs to firm up its operational plan, producing share settlement and clearing procedures, for example.ASX is CHi-X's preferred contractor for that task, but in talks ASX has resisted Chi-X's argument that it will bring big volume gains and should get volume discounts. Financial services Minister Chris Bowen warned yesterday that the government could, if necessary, use the Trade Practices Act to force ASX to allow access.ASIC meanwhile must not only implement the status quo rules it has announced but also develop new rules for a multi-market environment in time to meet a July target for its assumption of the supervisory role, and, through that, Chi-X's target of a start-up early in the fourth quarter of this year.Whether that timeline lets ASIC develop a broader position on regulating multi-markets is a thing to watch.In the United States, ASIC's equivalent, the Securities and Exchange Commission, announced in January that it was seeking public comment on how multiple markets are operating.Competition has driven trading costs down and trading volumes up, deepening market liquidity.But the markets that have been opened up to competition now feature liquidity silos rather than a single liquidity pool, and the new platforms have fostered the development of automated trading strategies for institutions and off-market trading channels that many observers believe have the power to undermine open markets, particularly for retail investors.Chi-X is going to operate an open market here. Its platform will not be hosting hidden off-market trading. The arrival of competitors nevertheless marks the spot for a more general call by both the government and ASIC about how the growth of multiple markets is going to be handled.An ASIC spokesperson said yesterday that the regulator was still aiming at third-quarter debut as the market supervisor, and would now look at overseas markets where competing platforms are operating to assess whether the regulatory status quo adequately deals with multiple exchanges.As it does that, ASIC is going to have to examine the same issues that the SEC is now publicly exploring. It wouldn't hurt and could help if it duplicated the SEC's inquiries here, and if that takes more time than the self-imposed deadline for its debut as market supervisor allows, the process should be extended €” with the government's blessing: this is a historic change in the way the markets operate in this country, and we need to get the settings right from day one.WEAK residential building approvals data for February and weak retail sales numbers sent market economists scurrying yesterday to change the odds on a cash-rate increase at next Tuesday's Reserve Bank board meeting, but the focus on monthly data is overdone.The Reserve has been consistently saying that it believes the global economy is recovering, and that Australia's economy is beginning to hit capacity constraints after surfing through the global crisis.But it has also been clear in stating it considers it has time to test those views, after moving early to raise rates last October, and after lifting the cash rate by one percentage point to 4 per cent. It can afford to wait next Tuesday, but a 5 per cent cash rate is still on the cards by year end.More comment insideJohn PereiraAlex MillmowIan VerrenderPages 8 & 9mmaiden@theage.com.au
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