Interview With Richard Murphy Of The ASX
Change is Australia’s electronic trading industry has accelerated recently. With competition looming the Australian Securities Exchange (ASX) has put in place several initiatives in order to retain its customers and fend off the incumbent alternative trading venues expected to descend rapidly once ASIC gives its approval. AsiaEtrading.com had an opportunity to speak with Richard Murphy, General Manager of Equities at the ASX to get some insight into what lies ahead at the Exchange and for Australia.
AsiaEtrading: Can you tell us about Volume Match and how it has been received by the market?
Richard Murphy: Sure, Steve. Volume Match is a large order execution service that we did what essentially is a soft launch of at the end of June, beginning of July, and it’s, I would say, an ongoing piece of work for us to get trading going on that. We have had about $15 to $16 billion of order traffic through it, but it’s all coming through one major broker, who’s doing the automated routing into it, so we’re currently working on other brokers with incentives schemes. We’ve released… announced an incentive scheme a couple of weeks ago, about ten days ago, actually, on… to encourage other brokers to route orders into Volume Match, so the large order pre-trade anonymous execution service that isn’t trading at the moment, but we are doing a range of things to encourage order activity into it.
AE: Of the orders that you are getting in, do you have any statistics on price improvement or average executed order size?
RM: Well, there is no average executed order size, but the way Volume Match works is every order has to be a million dollars or above, so obviously the orders going into it are all above a million dollars worth of stock. The average has been about 2 million, orders of about $2 million, and the average number of orders going in a day is about… it’s between 150 and six or 700 orders a day going into Volume Match, but it’s all from one broker, who is not hitting itself, for obvious reasons, so we’re working with the other brokers to get them to send orders in, at which point, obviously, orders will start hitting orders, and we’ll start getting trade there.
AE: Okay. Understood. Well, let’s talk a little bit about fragmentation in Australia. Competition is coming, and I just wanted to hear what the ASX’s view on exchange competition was.
RM: Well, our view has been the same, really, as when this debate as it was originally then, increasingly certainty that competition was coming to Australia, our view has been the same from the beginning, in 2006, which was competition, the concept is obviously a good thing. You know, when you run a stock exchange, you’ve got a whole set of listing rules and market rules, which enforce competition on listed companies, and brokers, etc, because competition is a healthy thing. Our view has really been this isn’t about competition. Everybody can vote for, do you like ice cream? Yes we do. What we’re saying is, well, what are the rules around eating the ice cream?
What are the rules for competition? And those are the rules that the government has been talking about releasing soon, meaning this calendar year, and perhaps next month or the month after that, the market integrity rules, which define the ground rules for how ASX and any competitors would trade and compete in a multi-market environment. So establishing things as being such as cross rules between markets, pre-trade transparency rules, best execution rules, whether or not there’s a post-trade consolidated tape of trade data. So it’s all these basic rules that they have in North America and Europe, which establish the ground rules for multi-market environments. So that’s really our view is you need to get these rules right. If you don’t have any rules, then you’re asking for a disaster, a bit of a debacle, and so it’s about getting these rules right, and what we’re anticipating is a consultation period coming up pretty soon for the markets, and every current and aspiring market operator to opine and give their view on how these rules are going to work, etc.
AE: Well, let me ask you then, how quickly do you think fragmentation will present itself once the incumbent exchanges begin operations in Australia?
RM: Well, almost certainly straightaway, because if you have another market operator providing a market in BHP, presuming… assuming they get their technology set up in terms of access from different players in the market, etc, the trading could occur straight away. It might not occur straight away, but it could, technically, occur on day one of another market operating you could get trades occurring on both markets, which is fragmentation. There’s no reason why it can’t occur immediately. It might, just given the way things seem to take off in Australia, it might start off pretty slowly, post new markets coming in, and build from there. But we don’t really have a crystal ball on all of them.
AE: Sure. Fair enough. Well, in an attempt to find liquidity, do you think the ASX will employ smart order routers into competitor trading venues?
RM: We have said we’re going to develop a smart order router. We’re calling it ASX Best, and it’s currently being developed in terms of talking to the providers. We’re not developing it totally by ourselves. We’re using a third party vendor to help us develop a smart order router called ASX Best, and we’ll offer that to all of our brokers and it will route to where it needs to route, and that may include other markets. That will, of course also depend on what the best execution rules say and the market integrity rules as to what our obligations are in that regard and what brokers’ obligations are in that regard, so that’s probably one of the more exciting areas of the market, is Australia embracing smart order routing in a bigger way than it does at the moment.
AE: Well, let’s take a look at some of the other developments at the ASX. You’ve just launched a volatility index. What does the ASX hope to achieve with this new index? And what were the drivers behind offering it to the industry?
RM: Well, it was really just based on the success of that index in the US market, where it gives investors and brokers an indication of likely trends in volatility, going forward, and it was really based on demand from brokers and fund managers, where if we develop the index, we may well then be able to develop products off the back of the index, being futures contracts and other types of products, which can track the index, and, you know, create opportunities for trading for people in the market. So that was really the thinking behind creating the index in the way we did.
AE: The ASX has also been looking further afield to support its business, such as in Chicago, where you’ve put a hosting solution with Equinix. What were the drivers to implement this offering, and how has this service been received?
RM: The service has been very well received. I don’t have the numbers on the top of my head, but it was extremely well received by customers looking to connect in, via that service, to get access to ASX, and in this case in particular the futures markets on ASX Trade 24, which is our futures trading platform. So really, it was nothing more than giving better access to US players who are interested in trading the range of futures contracts on ASX Trade 24, which is the new name for the old SYCOM, which we operated to SYCOM Five, and then we’ve rebranded it as ASX Trade 24. So it’s really, it was just an access point to provide much better access for the players in the United States. So it’s been very widely, very well received by the players who were connected to our market over there, and we anticipate, it’s early days yet, but we anticipate getting more volumes in those products as a direct result of putting that measure in place.
AE: Well, let’s move on now to what’s been going on to the electronic trading industry, globally, particularly with the circuit breaker policy that the US is putting in place to mitigate another flash crash. The ASX’s policy is at the discretion of the exchange. Are you planning to implement a more specific circuit breaker policy in the near future?
RM: It isn’t directly under ASX policy control now, since we’ve had supervisory separation of certain responsibilities, to as we can set responsibilities staying in the ASX compliance division, so it’s now, essentially, with competition coming in, it will be a whole of market policy development that the government and ASIC will preside over. I would say that it’s still an area being debated in detail between the regulator and the exchange and other market operators and brokers, to establish what is the best model for Australia. What do we need to put in place for Australia, and how does it work in a multi-market environment? So we don’t know what the answer’s going to be there. We know we’ve put in our private submission to government, when requested to do so, or to the ASIC, when requested to do so, as with others in the market, just really identifying what we do need in Australia, and, you know, where we… you know, what measures we need to put in place and what it’ll involve, etc.
AE: Well, Richard, one final question, related to high frequency trading and risk, what is your view of naked or sponsored access, and is the ASX actively reviewing this type of service?
RM: Sure. Well, we wouldn’t see naked and sponsored access as being synonymous, if the question is naked or sponsored as being synonymous. We see naked access as being one thing, sponsored access as being another. Naked access is where the client is essentially renting the brand or the trading number of the broker, and coming directly into the exchange, without any filters or pre-trade risk management by the broker. So it’s essentially direct access, true direct access, for the fund manager. We don’t think any market should have that. We don’t think any market really thought about that when it was introduced overseas, and it really just came to… it’s a case of technology being ahead of regulation in the United States, in our view, usually technology does lead, but it led to the point where it actually was enabling certain things, when looked at in the cold light of day should never have occurred in the first place. So we’re very against naked and sponsored access, and we assume our government, we think our government is as well, and ASIC, and we don’t think we’ll have naked or sponsored access in Australia.
But sponsored access is basically a faster mechanism from the current model of limited direct access, as fund managers have, which is DMA, or Direct Market Access, and sponsored access for us, which is the faster version of DMA, which is really looking at the technology involved between the exchange, the brokers and the fund managers, making sure that there is appropriate pre-trade risk management in kill switches, and drop copies, etc, and going to the brokers. So the broker is totally on the hook, but you just basically remove unnecessary latency hurdles that cause the fund manager, or the high frequency trading fund manager in this case, to basically be slower than they would. So it doesn’t get you as fast as naked, and neither should it. We say, well, there should be appropriate filters in place, but it’s basically looking at the mechanics of all of those filters and putting the right ones in place without having the wrong ones slowing things down unnecessarily.
So we are very proactive on that, talking to our regulator, ASIC, on how we think it should work, and they will obviously review that and come back to us and, in due course, but that’s something we think will play out, probably throughout 2011, calendar 2011. Beyond that we don’t really have a sense of when exactly that model will or won’t be allowed.
AE: Okay, well, Richard, thank you for your time today, and we look forward to hearing your presentation at the conference in Sydney this November.
RM: It’s a pleasure. Thanks for conducting the interview, Steve.
AE: You’ve been listening to AsiaEtrading’s interview with Richard Murphy, General Manager of Equities at the ASX.
You can meet Richard at the Capital Markets Technology 2010 conference being held on November 30 in Sydney, Australia