Challenges of Entering Exchange Space

Terry Flanagan

New trading venues entering the competitive exchange space face an uphill battle.

The exchange space is one that is constantly evolving, from mergers and consolidation, to the uncertainty surrounding regulation. It is an environment that is becoming increasingly difficult for newcomers.

Chi-X Australia launched in late October and quickly reached over 2% market share within its first month. It has since fluctuated between the 1% and 2% range. Market observers note the company is aiming for 10% market share in the nation, an important symbolic milestone for the company, as it tries to break the near monopoly of the Australian Securities Exchange. It will look to do that through aggressive pricing and new initiatives.

Starting a new trading platform in Australia comes with its own set of unique challenges.

“There is no ATS or MTF framework in Australia so starting a new venue means being regulated as an exchange,” said Jason Keady, director of markets and operations at Chi-X Australia. “The regulatory framework to support competition between market operators has only recently been introduced and its evolution is continuing at a rapid pace. Keeping up with this changing regulatory environment places a strain on resources for us and the industry at large. “

Just like it has done in other markets, Chi-X Australia has introduced innovation and lowered transaction fees for participants. The ASX slashed its own fees in half in the months leading up to Chi-X’s launch and has put a renewed focus on increasing speed. The ASX also launched PureMatch, a trading system aimed at high-frequency traders, shortly after Chi-X’s inception. The alternative venue is now taking the steps to also topple the ASX’s monopoly on clearing services.

While coming in as a new competitor presents challenges for the incoming venue, increasing competition is something that broker-dealers welcome.

“I’m a big fan of competition,” said one New York-based electronic trading executive. “It causes competition in pricing, technology, and brings down costs. It improves liquidity and efficiency, and results in faster improvements.”

“Competition in the trading space has already reduced trading fees significantly and we anticipate alternative clearers will also have a dramatic impact on the cost of clearing in Australia, which would further lower transaction costs,” said Keady. “This would make the Australian market more efficient and internationally competitive.”

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