Chi-X turns the key and market monopoly ends

Australia took its first steps into the world of competition as Chi-X opened for business.

By InvestSMART · 1 Nov 2011

By InvestSMART ·
1 Nov 2011

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Australia took its first steps into the world of competition as Chi-X opened for business.

THE volumes were tiny yet symbolic. A test parcel offered here. A curiosity bid there. But for the first time, they were share trades not made on a monopoly market run by the Australian Securities Exchange. Share trading in Australia took its first steps into the world of competition yesterday as Japanese-owned rival Chi-X opened for business.

Immediately, trading prices fell for customers and revenue began bleeding from the erstwhile monopolist.

Chi-X said almost $4 million in shares changed hands in more than 800 trades in a limited market, offering six stocks and two exchange-traded funds on the new platform.

But it's not the end for the ASX just yet. It performed about $4.3 billion in trades yesterday.

While Chi-X boss Peter Fowler was not keen to disclose many details, information readily available on Chi-X's website and via Bloomberg reveals how small the baby steps were that Chi-X took on day one.

Just 2000 Leighton shares were traded on Chi-X compared with 700,000 on the ASX. And 62,000 BHP Billiton shares were traded on the new platform compared with more than 13 million on the ASX.

Although Mr Fowler said an ''initial look'' at prices on the two exchanges showed that ''throughout much of the day better prices were available on the Chi-X market'', data published by the two exchanges shows Chi-X did not provide the intraday low on any of the six company stocks traded compared with the ASX.

Share-price spreads differed greatly on the two exchanges. While BHP shares traded almost identically on the two platforms, big price differences could be observed in stocks such as Leighton and Woolworths. Leighton traded in a price range on the ASX of $21.61 to $22.38 before closing at $21.84. On Chi-X its low was $21.72, its high $22.07 and it closed at $21.92. Profiting from the spread may have been difficult given the low liquidity.

The different trading prices can be expected to smooth out as greater liquidity moves into the alternative market, in particular from high-frequency traders, looking to profit in the flash of an eye using high-powered computer programs from price differences between the two exchanges.

After last Thursday's technical glitch that closed the ASX for half a day, Mr Fowler said: ''I'm very pleased, delighted to say we've had a largely uneventful day, no surprises. It was exactly what we were hoping for.''

Traders used the day as a ''road test'', he said. ''I have a feeling some of them were very much toeing the water, just to test their systems were operating properly.''

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Frequently Asked Questions about this Article…

What was Chi‑X’s launch in Australia and why does it matter to everyday investors?

Chi‑X, a Japanese‑owned rival trading platform, opened in Australia and for the first time ended the ASX’s monopoly on share trading. Although volumes were small on day one, the arrival of Chi‑X introduced competition that immediately put downward pressure on trading prices for customers and began to erode revenue from the ASX.

How much trading did Chi‑X handle on its first day compared with the ASX?

Chi‑X reported almost $4 million in shares changing hands across more than 800 trades on launch day, offering six stocks and two ETFs. By contrast, the ASX handled about $4.3 billion in trades the same day, showing how much smaller Chi‑X’s initial volumes were.

Which stocks and exchange‑traded funds were available on Chi‑X at launch?

On day one Chi‑X offered six company stocks and two exchange‑traded funds. The article specifically mentions trades in companies such as Leighton, BHP Billiton and Woolworths among the limited set of securities available.

Did Chi‑X provide better share prices than the ASX on launch day?

Chi‑X’s boss said an “initial look” showed better prices were available on Chi‑X throughout much of the day, but published data showed Chi‑X did not register the intraday low for any of the six company stocks versus the ASX. Results varied by stock — BHP traded almost identically on both platforms, while Leighton and Woolworths showed bigger price differences.

Why were price spreads different between Chi‑X and the ASX, and what does that mean for investors?

Price spreads differed largely because of low liquidity on the new Chi‑X platform. With few shares changing hands, intraday highs and lows were more variable, making it harder to capture profits from spreads. The article notes that as liquidity increases, these price differences are expected to smooth out.

Will high‑frequency traders (HFTs) affect pricing and liquidity on Chi‑X?

Yes. The article says greater liquidity is likely to come into the alternative market in particular from high‑frequency traders using fast computer programs to profit from price differences between exchanges. Their activity should help narrow price gaps and increase liquidity over time.

Did Chi‑X or the ASX experience technical problems around the launch?

Chi‑X reported a largely uneventful first day with no surprises, according to Chi‑X boss Peter Fowler. This followed an ASX technical glitch the previous Thursday that closed the ASX for half a day, highlighting the importance of operational reliability in trading venues.

What should everyday investors take away from the arrival of Chi‑X in Australia?

Everyday investors should note that competition from Chi‑X can lower trading prices and put pressure on the ASX, but early volumes on the new platform were small so price and liquidity differences existed. The launch was treated by many traders as a “road test,” and the article suggests these dynamics are likely to change as more liquidity and automated traders enter the market.