I was interested to watch John Fildes interviewed by OpenMarkets for a blog in December 2015. When describing the entry of Chi-X to the Australian market, he used the analogy of Woolworths Ltd (AX:WOW) versus Coles; Chi-X and the ASX Ltd (AX:ASX), two similar businesses vying for a competitive edge that would deliver market share over the other.
However, I disagree. In the battle for supremacy, the two large supermarket chains have hurt third parties in their bid for market share, largely their suppliers…$1 milk anyone? ChiX has done the opposite. It arrived with the intent to offer better, faster, cheaper trading and this forced the incumbent ASX to innovate and reduce transaction costs.
Chi-X has worked closely with a range of third parties to provide technical solutions and lower cost transactions for investors. Perhaps Aldi would have been a more apt analogy; for like Aldi, Chi-X is not just a competitor, but a disruptive industry-changing competitor.
Its name hinted at such. Derived from the Greek letter Chi, which is written as "X", Chi-X was chosen to symbolise the crossing of the two sides of a trade. Blend “X” from the English alphabet, and the name signifies a combination of the old and modern worlds; or in other words, traditional securities trading techniques married with cutting-edge technology. And, in a nutshell, this is what Chi-X has delivered to Australian investors.
Exchange v exchange
Until Chi-X’s entry in 2011, the ASX had a monopoly on IPOs, company listings, execution and settlement services. While it continues to have a monopoly on clearing and settlement, (see Rick Klink’s blog "Why ASX monopoly on clearing is hurting our financial services industry".) the tide is turning; Chi-X is not shy about applying pressure to have competition extended to clearing and settlement services.
Being a stock exchange, Chi-X can develop products; as outlined in figure one, Chi-X has so far created warrants and exchange traded funds (ETFs) and has some innovative products in the pipeline.
If your broker is connected to Chi-X, you have the choice to buy or sell securities on either ASX or Chi-X, where the end product (the parcel of holdings) is exactly the same. Because clearing and settlement remains the domain of the ASX, any stocks purchased through Chi-X will settle on your clients’ CHESS HIN as with an ASX trade. Stocks can be bought on the ASX and sold using Chi-X – and vice versa.
Given a broker’s requirement to get the best possible price for a client, Chi-X now has more than 44 trading participants; OpenMarkets has been a participant since May 2015.
Getting the best deal for your clients
A number of factors influence a financial adviser’s selection of broker. Some may be mandated by a dealer group, others choose based on relationships, research or cost. Ultimately, it’s up to the adviser and broker to ensure the investor – the client – gets the best price possible.
The dark market
One way Chi-X runs rings around the ASX in this regard is its use of the ‘dark market’. Conditioned by years of comics, cartoons and corny TV shows, to me the dark market sounds an alien place populated by nameless traders wearing ironic t-shirts and chowing down on fast food. It’s not.
Lit trading, that which is available to most retail investors, provides transparency. You can see the buy and sell price.
Dark trading is mid-point trading. It gives all investors a chance of price improvement; previously the domain of institutions because the ASX doesn’t easily accommodate retail investors in its dark market.
In the dark market there is no pre-trade transparency, and for good reason – when institutions are trading large blocks of stocks, they can move the market. For example, a fund manager elects to sell one million NAB shares; these trades are generally ‘in the dark’ so no one knows how many shares are being bought or sold. In such cases, brokers are willing to give up some of the spread to keep private the number of shares being bought or sold.
Chi-X offers one step dark trading for all investors; one third of orders on Chi-X get a better price by trading at mid-point. Its integrated order book, provided at no additional cost, means dark and lit markets work together; trades automatically look at both markets before placing the trade, and this also means that queues move faster.
The ASX has a three step dark trading process, plus higher charges – as a result, most brokers don’t transact for retail investors via the dark market.
Smart order routers
The introduction of smart router technology allows for better, faster, cheaper trades. The smart order router scans the ASX and Chi-X to ensure brokers meet ‘best execution’ obligations and get the best price for the transaction.
Smart order router technology also allows for split trades. For example, and investor wants to buy 100,000 CSL shares. Best execution, or availability, may be obtained by buying a portion on ASX and the remainder on Chi-X.
So, my broker is ASX only…
There are a number of reasons to choose a broker that transacts through both ASX and Chi-X:
- Growing volumes – Chi-X has approximately 20% market share; this is substantially higher in certain stocks and this may lead to better pricing and execution in those stocks
- Clients may struggle to get good execution if not connected to all liquidity in the market
- Innovation in the Chi-X platform has led to the integrated order book, which provides price improvement opportunities for buyers and sellers. While price improvements are individually quite small, they can add up quickly for active traders (note: the ASX charges for its equivalent, Centre Point, for those brokers wanting to access the mid-point market)
- Lower cost of execution for brokers – some, like OpenMarkets, pass look to that saving through reduced brokerage charges.
- Chi-X offers a range of exchange-traded warrants and ETFs that can only be traded through that exchange.
The most exciting thing about Chi-X is its focus on innovation. Although its arrival in Australia lit the proverbial fire under the ASX and caused it to both reduce costs and innovate, Chi-X is not resting on its laurels. In February 2017, Chi-X is launching TraCRS, securities based on an underlying asset that is listed in an offshore market. It will initially include the main US exchanges NYSE and NASDAQ; this will enable Australians to invest in the top US stocks via an Australian exchange. Now that it has clearing in its sights, it may not be too long before another ASX monopoly bites the dust.