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Australian study says trading venue competition has brought net benefits

First Published 25th June 2013

An Australian academic centre said competition in the wake of Chi-X entering the local market produced net benefits even after taking account of costs associated with regulatory issues.

A study by Capital Markets Cooperative Research Centre (CMCRC), an Australian academic centre, said competition in the wake of Chi-X entering the local market had brought net benefits of up to $215 million.

Professor Michael Aitken, CEO of the CMCRC and Professor of Finance at UNSW, said the study looked at how the introduction of competition to the Australian equity market affected market quality. It estimated metrics representing efficiency and integrity before and after the introduction of Chi-X and sought to quantify the cost savings arising from reduced trading costs.

"Importantly, they then compared these to the additional costs competition had imposed, including increased costs of regulation and the technology costs borne by the trading community connecting to the new centre," CMCRC said in a news release.

"We have heard a lot from the trading community about the extra tech and regulatory costs they have to bear now, so we were somewhat expecting our results to reflect that," Aitken said. "However the results demonstrated unequivocally that the industry has saved money overall, even taking into account ASIC's cost recovery program."

The paper examines market efficiency by estimating changes in transaction costs and price discovery.

"We looked at bid/ask spreads and found that quoted, realised and effective spreads had declined since Chi-X was introduced. The more Chi-X volume goes up, the more these decline which means that as Chi-X gains market share it becomes cheaper overall to trade equities. This has resulted in cost benefits for all investors but particularly those trading the securities jointly traded on the ASX and Chi-X."

The study also reviewed price discovery mechanisms.

"We looked at the data over a number of time periods, and measured competition as a continuous variable," Aitken said. "Our conclusions remained consistent under all scenarios so we are very confident to say that yes, competition has been an unequivocally positive thing for Australia."

Aitken said competition in Australian markets should not be compared to more highly fragmented markets such as the US. "We have the situation here where we have two primary markets and a number of dark pools, and this level of fragmentation is small compared to the US where there are over 300 different trading venues," he said.

"The benefits we find in this study are consistent with what we'd expect to see from the initial break-up of an effective monopoly. It should not be construed as advocating competition such as the US experiences - that is a completely different scenario."

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