ASX Learning From US Mistakes?
About a year and half ago, we were contacted by an old colleague who runs an equity research firm. He had a client who was very interested in market structure, in particular the client wanted to understand the changes that had been occurring in the US equity market structure. Our friend asked if we could meet with him and his client to talk about some of the white papers that we had written. It turns out that this client was an investor in the Australian Stock Exchange (ASX) and they wanted to know about the dangers that their investment may be facing. We sat down with them for about an hour and explained all the new regulations that the US equity market had encountered over the past decade including Reg ATS, the Order Handling Rules, Decimalization and Reg NMS. We explained that while some of these regulations may have had good intentions, the result had been a market structure that was filled with unintended consequences. Years of regulation and conflicts of interests at the exchanges had created a monster that could not easily be dismantled. We think we either scared the blank out of these investors or unfortunately may have gotten their profit wheels turning. It turns out that we may have done a little of both.
In an effort to compete with a recently approved electronic exchange, Chi-X Global, the ASX has decided to open up their doors to high frequency traders and has created a product just for HFT called PureMatch Click here for short video on PureMatch PureMatch will most likely have all the goodies that the HFT’s love like co-location, make/taker pricing model, sponsored access and access to proprietary data feeds. However, the ASX is trying something unique with their new product. They will run it in parallel with their existing TradeMatch central limit order book. It will also only be available for the top 200 stocks. So why the unique approach? Why not just copy the US and Europe and just give in to the high frequency traders? According to a recent Bloomberg article click for Bloomberg article an ASX official explained it this way:
“We observed developments in America over the last 10 years and what Mifid has done in Europe,” he said, referring to Europe’s Markets in Financial Instruments Directive rules for competition among exchanges. We’ve learned the lessons from what worked and what hasn’t worked elsewhere around the world. You can’t have one model that satisfies both high-frequency traders and block traders since they both want fundamentally different things.”
The ASX knew they couldn’t hold out any longer from the HFT pressure. But they were smart enough to sniff around and try to build a better mousetrap. We would like to think that our little talk with the ASX investors back in 2009 may have helped influence their opinion. We will be watching the launch of PureMatch , which is scheduled for the 3rd quarter of 2011, very carefully. We hope that our regulators will also be watching and possibly learning something as well.