Karen Cullen-Evans talks to Boardroom Radio about the impact of the new Chi-X equity trading market

With David Bushby, Boardroom Radio

David Busby

Today BRR speaks with Karen Evans-Cullen, a partner in the Corporate Advisory M&A Group at Clayton Utz in Sydney. Karen, the Chi‑X Securities Exchange opens its doors for trading at the end of this month and will compete for the first time with the Australian Stock Exchange. What impact will this have on listed companies?

Karen Evans-Cullen

Well for listed companies David the impact of Chi‑X commencing operations in Australia will be fairly minimal. Chi‑X is initially going to offer trading in six stocks when it launches and it's then going to increase this to all of the 200 stocks in the S&P ASX 200 Index after six trading days so the first six stocks will be BHP Billiton, Woolworths, CSL, Origin Energy, QBE and Leighton Holdings.

S&P have said that they won't take trading on Chi‑X into account when calculating all of their benchmark indices that they produce for the Australia markets, although they will monitor trading volume on Chi‑X to see whether they need to reconsider this decision.

David Bushby

And initially with those first six stocks and then the rest of the ASX 200, do those companies really need to do anything?

Karen Evans-Cullen

No, they don't really need to do anything at all. It will just happen automatically. Chi‑X is actually not going to offer its own listing, so listings of companies will still all be done through the ASX and this means that it really won't have any impact for the companies whose stocks are traded on Chi‑X in terms of how they interact with Chi‑X or indeed the ASX.

The possible positive effect I suppose for those companies whose shares are traded on both Exchanges will be that when they have improved liquidity in their shares for their investors.

David Bushby

And just with the start of Chi‑X trading also comes the new ASIC rules governing competition between the Exchanges. What effect will this have for them?

Karen Evans-Cullen

Once again, listed entities won't really be affected by these new rules. The burden of complying with those rules is going to fall mostly on brokers and the Exchanges themselves and in particular because Chi‑X won't be competing with the ASX for listings. Listed entities will continue to deal with ASX only in relation to all of the elements of being a listed entity like continuous disclosure, lodging documents, or getting securities quoted.

So this means that if you're a listed entity you only have to lodge information with ASX or apply to ASX to get new securities quoted and then will automatically just flow through onto the Chi‑X Exchange as well.

David Bushby

And what about for market participants like brokers and traders and the like?

Karen Evans-Cullen

The main impact of ASIC's new rules on the market participants is the introduction of a best execution rule. This will mean that market participants are obliged to take reasonable steps when they're handling a client order in order to obtain the best outcome for their client.

The best outcome for a client may depend on whether they're a retail client or a wholesale client. In relation to retail clients the best outcome is usually going to mean the best total price whereas with wholesale clients there might be other factors which are relevant such as the timing at which you can execute trade and fulfil their order.

David Bushby

In terms of price say for on the retail side of things, are we expecting Chi‑X to be a cheaper execution and therefore a broker would look to trade primarily through that platform if it is in fact a cheaper trade?

Karen Evans-Cullen

Yes well I think that's the reason why ASIC has introduced this rule because the pricing that Chi‑X is going to be charging to the market participants is different. It's structured differently to the way ASX does it.

In particularly Chi‑X is proposing to provide rebates to brokers in certain circumstances, so ASIC wanted to make sure that the choice of venue is governed by the price you can get or the outcome you can get for your client rather than the outcome the broker's going to get through trading on that venue.

David Bushby

And just to be clear we do know what that pricing structure is going to be or is?

Karen Evans-Cullen

Yes I think that has been announced, yes.

David Bushby

And just finally, what is next on the regulatory agenda for securities exchanges?

Karen Evans-Cullen

Well the Exchange competition is only, really only part of the story in relation to the development of the Australian Exchange industry. There's lots of changes obviously happening globally in that industry and they're flowing through to Australia.

I think the three major issues which are probably on the agenda for ASIC and the broader regulatory environment in Australia are high frequency trading, competition in the clearing and settlements industry and also dark pools.

In relation to high frequency trading, the key question here is whether ASIC has enough regulatory control to address the potential for flash crashes which are brought on by the electronic or algorithmic trading strategies that are employed in high frequency trading. So ASIC have said that they are looking at further regulatory changes or rules that they'll introduce in 2012 to deal with that.

In relation to dark pools, once again ASIC is looking at bringing in some new rules in 2012. The dark pool is a private electronic transaction network and typically they're maintained by the major banks and stocks are bought and sold by clients of those banks, and because the matching of the buyer and the seller is done entirely within the control of the bank, the bid offer and sale prices are not published to either the ASX or Chi‑X when it starts. And the key issue is that if a significant volume of trading moves into these dark pools then this can impact on the quality of price information on the public markets like ASX and Chi‑X. So I think ASIC is looking at how it can ensure that it maintains the quality of price information on those markets.

David Bushby

And is that, or that level of regulation or supervision, something that's not too far away? Are there positive steps being taken to deal with that?

Karen Evans-Cullen

Yes, ASIC put out a consultation paper in 2010 dealing with a whole range of structural issues in the Exchange industry. Dark pools and also the high frequency trading were things that they were considering in that and they've had submissions from people and they've said that they'll be ready to come out with some new rules in 2012. So they don't seem to be too far away on that.

David Bushby

Oh we'll certain keep a close eye on it and leave it there for now. But thanks again for your time today Karen