Timing is everything, as ASX painfully discovers

Yesterday should have been a happy one for most people with money in the sharemarket.

Yesterday should have been a happy one for most people with money in the sharemarket.

Small and large shareholders alike have been waiting for some concrete move towards a resolution of the long-running European sovereign debt crisis.

Finally, by late morning (our time), European clouds started to lift as news trickled through that the banks holding Greek bonds had agreed to take a 50 per cent haircut.

It's not over but the deal does represent at least some kind of early breakthrough. For investors, it should have been a buying opportunity or at the very least a massive sigh of relief. Instead it was an exercise in frustration.

We are are all too used to seeing headlines about a market crash. Investors can often lose money - it is the risk we sign up for as investors or superannuants.

But when the market maker - the exchange that facilitates the trading of shares - stops operating, the blame is placed squarely on the shoulders of the ASX.

Yesterday's four-hour closure of trading on the ASX was nothing short of a shemozzle.

And make no mistake, some large investors, particularly proprietary trading institutions and hedge funds, would have lost money as a result of the inability to trade.

By way of example, some investors holding short positions - essentially a bet on stocks going down - would have been caught out by the inability to cover those positions during the four hours when they knew share prices would rise.

The ASX will have a lot of unhappy clients and plenty of questions to answer about how its system crashed.

Whether there are calls for compensation remains to be seen.

Elmer Funke Kupper, the managing director and chief executive, said: "Today ASX did not meet the high standards that we set for ourselves and that our customers expect."

One consolation is that the futures markets were operating, so institutions could trade the share price index futures as a proxy.

But there was also lots of action among individual stocks - plenty of news and plenty of reasons to buy and sell.

The day began with National Australia Bank's full-year results. They were slightly better than analysts had expected - costs were contained and the charge for bad and doubtful debts continued to fall. The results also confirmed that the bank had been successfully taking market share from some of its rivals - an outcome that had value implications for some other bank stocks.

Next off the block was Woolworths, whose quarterly sales were patchy and less impressive than its competitor Coles. But there could be no flurry of market activity on the immediate release of this information.

When the market reopened in the afternoon, Woolworths became one of the few large stocks to register a fall.

Ten Network released a well-telegraphed disaster - profits down 90 per cent. But investors bid the stock up in the belief the turnaround story had merit.

Meanwhile the ASX trading crash, which was said to be the result of the testing of ASXPlus, a new product, was one of those pivotal occurrences that could not have happened at a worse time.

The ASX is set to get its first taste of competition when Chi-X starts operating on Monday.

Many large brokers have already indicated they will place some of their business with the start-up operator owned by Japan's Nomura.

But the ASX breakdown cemented the need for more than one operator in the market.

The new exchange will now become the back-up and a potentially meaningful competitor.

In much the same way, Virgin Australia has been lucky to have launched its upgraded business market product at the same time Qantas is feeling the ill-effects of disruptions to its flying schedule.

Business travellers all over Australia have been giving the Virgin service a try and some will remain using the smaller airline, at least as a secondary supplier, even after the Qantas industrial action has been sorted out.

For the ASX, the system collapse will not have a meaningful impact on revenues or profits. Much of the volume lost by the halt was recovered when the market began trading yesterday afternoon.

But it served as a reminder that there have been several instances over the past couple of years when trading platforms have crashed and a back-up exchange would be handy.

Luckily for the ASX, the crash was overshadowed by the upbeat response to the news from Europe which pushed the index up almost 2.5 per cent.

Not surprisingly, shares in local banks and resource companies felt the immediate effects of the euro package as did the Australian dollar.

While the news was a much needed stake in the ground towards resolution of the European debt crisis, economists warned it was not a cure-all for the problems.

European banks will take a 50 per cent loss on their Greek bonds and will then require a bailout themselves in the order of ?110 billion ($147 billion) in order to get their capital ratios at the more secure 9 per cent level.

But who pays for this?

The first stop will be the various European governments - many of which are not flush with funds. The deal also entails member governments beefing up the European Financial Stability Facility as a last resort to support bank funding.

Under this scenario, the debt does not disappear but is dispersed or moved around in a kind of pass the parcel game.

As the AMP Capital Investors chief economist, Shane Oliver, points out, it is doubtful this will mean the end of the European crisis. He says the vicious cycle of fiscal austerity, weaker growth, budget blowouts, ratings downgrades and more fiscal austerity will likely remain.

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