To eliminate the problem and improve market quality, regulators everywhere need to define and measure fairness and efficiency before and after major design changes in their trading systems to ensure the proposed changes reap the desired effects on market fairness and efficiency. “By measuring every market in the world quarterly, we can establish differences and then seek to explain those differences through the design choices made for the market place over the previous quarter,” Aitken says.
Facing up to Australia’s challenges
High transaction costs are an issue in Australia, concurs Jerry Parwada, head of Banking and Finance at the Australian School of Business. Questions about transaction costs and fairness should definitely be asked of policymakers charged with promoting market integrity and monitoring for potential abuse. “If the market is so sophisticated and innovative, why are we paying such high transaction costs?” he asks.
Parwada believes Australia’s comparatively small size, which prevents it locking in economies of scale, is the reason it lags the major markets. The recent arrival of a competitor, Chi-X, which now offers an alternative trading platform in Australia, might provide lower trading costs, Parwada suggests. “The problem is that we had only one main market and all the competition was at the broker level,” he says. “Now, with the arrival of Chi-X we have competition at the market level as well.”
Until the Capital Markets Cooperative Research Centre (CMCRC) produced its latest market quality report showing the advantage of one market over another, no figures for forecasting have been available to market designers. Accurate numbers will help the Australian market resolve problems. Challenges are in the composition of the Australian securities market with a dominance of small companies that are difficult and mostly uneconomical to research. Prime drivers of activity are the large stocks and information is scarcer for all but the high-turnover companies. The potential trading costs of having Australia’s dominant stocks cross-listed in markets such as London, New Zealand and New York also need to be considered.
Australia is often used as a surrogate for Asia by some hedge funds and that can introduce some temporary dislocation. As Parwada observes: “In aggregate these capital flows are quite benign in nature and aid price discovery, sometimes Australian securities are a surrogate for investing in China, say, and investors looking at economic fundamentals could easily get confused since they are seeing the effect of what could be interpreted as noise. This can confound integrity analysis.”
Relative to similar Asian markets, attention will always be drawn to the fact that the ASX removed the ability of market participants to observe the identities of brokers behind transactions. The Korean market has instead moved from opacity to transparency in relation to broker identities.
Finally, the quality of information might be compromised by a simple lag in technology keeping up with the demands for highly frequent information updates, claims Parwada. For instance information announcements made by ASX companies are still labelled as being price-sensitive manually, introducing the possibility of human coding error. “I understand research being carried out at the CMCRC to automate the identification of price-sensitive news releases may ameliorate this problem,” notes Parwada.
The ASX has declined to respond to the CMCRC findings, but says making direct comparisons between markets is fraught due to, among other factors, the different regulatory regimes, number of market operators and levels of liquidity. “Moreover, Australia is currently undergoing significant structural change and increased complexity,” concludes a spokesperson.
