Asia has long-been regarded as a competition-averse, exchange-dominated marketplace. But this summer offered the first hints that small structural changes are afoot in the region, with the creation of a competition-friendly supervisory structure in Australia and, perhaps more significantly, the long-awaited regional entry of Chi-X, the hyper-fast and super-successful alternative trading venue.
The ambitious up-start is launching a full-scale attack on the region, with its first stop - it was revealed in August - to be the Singapore market. But there is an interesting twist to the latest instalment of the Chi-X story: while in other markets the alternative trading platform has presented itself as a challenger to the incumbent exchange, in the Singapore market Chi-X has announced that it will be forming a joint venture (JV) with the Singapore Exchange (SGX) to launch the first exchange-led non-displayed or so-called 'dark' pool in the Asia-Pacific region.
Even more eye-catching, however, is the JV's intention to offer block crossing not only for equities listed on the SGX, but for those listed on the Australia, Hong Kong and Japan exchanges - albeit on an offshore basis - making it a pan-Asian proposition. This was a key draw for Chi-X, says John Lowrey, CEO of Chi-X Global. "SGX was the perfect partner because its ambitions are aligned with our ambitions in that it is interested in the development of the pan-Asian market," he says.
The deal, in which Chi-X's subsidiary technology company will provide the technology platform for the crossing network, marks a departure from the historical Chi-X model under which the company entered Canada and Europe not only as an alternative contender, but, at least initially, as a fully lit platform. "We're in the business of creating market centres that match the need for a variety of liquidity aggregation. Lit markets are one of those key places, but dark pools are just as valuable," says Mr Lowrey. In Singapore, he says, entering as a dark venue seemed the right strategy because it filled a need in the market.
That Chi-X has had to take a different approach in Asia reflects the challenges in the young Asian marketplace, where exchanges dominate not merely from a regulatory and structural perspective, but from a philosophical perspective too: for many Asian exchanges - which are often as much political as financial institutions - competition of the sort represented by the emboldened Chi-X is very unwelcome. But this is not a function of ignorance, says Lee Porter, managing director of Liquidnet Asia, the successful US-headquartered buy-side crossing network. "Exchanges in Asia are very cognisant of what happened in other markets by allowing other players in: they saw what happened to the market share."
According to Mr Lowrey, SGX also made the perfect partner because it welcomes competition in its own market. But by going dark and providing the requisite technology and technical expertise, Chi-X is able to offer the SGX a tantalising opportunity to expand its local and regional presence while securing for itself a long-sought-after entry into the region. In the view of one trader, the association with SGX, a well-established, if smaller south-east Asian exchange, is a "smart move" for Chi-X as it confers a strong degree of legitimacy on the brand which has yet to establish itself in the region.
In this respect, the deal is less about competition than it is about innovation. As such, it offers a key lesson for alternative venues sitting on the Asia sidelines: if competitors want to enter certain Asian markets, they will have to be creative. Attempting to attack the exchanges head on may prove - in some instances - the least strategic means of entry.
John Lowrey, CEO of Chi-X Global
Post-trade troubles
It may be premature, however, to conclude much else. The JV is still in the process of applying for a licence for the Singapore market, although a spokesperson for Chi-X said the company anticipates no difficulties in this process and expects the JV to go live in 2010 as outlined in August.
The Banker understands that more details on the technical specifics of the deal are to follow in mid-November. These will be hotly anticipated by many market-watchers, who believe that there will be several wrinkles to iron out, not least the issue of clearing and settling across what the JV hopes will become a pan-Asian platform. According to the August announcement, SGX-listed stocks will be cleared and settled through SGX's securities clearing house and depository. But the JV will have to appoint a pan-Asian central counterparty (CCP) to clear any other trades. Jean-Pierre Baron, managing director for Asia-Pacific at Fidessa, a trading and connectivity software provider, says the realisation of a pan-Asian trading venue will be challenged by these back-end complications. "They will have to go downstream to the clearing level and that is very complex if you take a pan-Asian view. Equities are very localised markets and there are a lot of country-specific issues."
But the SGX-Chi-X JV is not the only trading venture proposing to span several Asian markets. In February, the Association of South-east Nations unveiled its plans to create a pan-Asian trading linkage which would allow, for example, a broker sitting in Thailand to trade stocks listed in the Philippines. Francis Lim, CEO of the Philippine Stock Exchange, a strong advocate of pan-Asian initiatives whose own exchange is part of the link-up, says it will eventually be progressed to the clearing and settlement level - but the details remain unclear.
What is clear, however, is that for any such pan-Asian utility to be a success, the post-trade process will have to be as seamless as possible, with each participating country's CCP able to clear cross-border on multiple venues. More importantly, it will have to be cost efficient. "If they can figure out a way to make the clearing work, then it has a really strong chance of being a success," says Glenn Lesko, CEO of Instinet Asia, an agency broker of which Chi-X is also a subsidiary. As such, it is clear that the SGX-Chi-X platform, if a success, will be important for the whole of the Asia region, offering a precedent for other ventures to follow. This is not lost on Mr Lowrey. "This announcement is not just around trading, but around the creation of infrastructure that is going to help the development of the Asian markets in general," he says.
Supervisory shake-up
Elsewhere in Asia, other developments are afoot, the most notable of which has taken place in Australia where a number of European upstarts have sought to shake up the status quo and compete with the Australian Stock Exchange (ASX). Chi-X, Liquidnet and AXE, a JV between the New Zealand Stock Exchange and five other banks, filed applications for trading licences more than two years ago to, what looked like until recently, no avail. But then in August, news came that a long-awaited shake-up of the unusual prevailing Australian supervisory structure - under which ASX would in theory have supervised its own competitors - would likely usher in a much-anticipated era of competition.
The ASX, which will be stripped of its real-time market trading supervisory powers, has accepted the development with little protest. ASX declined to comment on the implications of the development for the Australian marketplace. However, in the exchange's annual results briefing for 2009, chairman David Gonski made his feelings on the subject perfectly clear when he suggested that competition would not necessarily bring the cost savings to the comparatively small Australian marketplace that onlookers have been led to expect.
He also told the assembled shareholders that it is not a foregone conclusion that the Australian government will issue new licences as a result of the regulatory overhaul. A total failure to grant new licences, however, would seem a perverse outcome. Mr Porter believes this is unlikely. "The government would not have made the structural change if it had not intended to grant licences." But this is not to say, however, that the road to competition will be entirely smooth, he adds. "As for when it happens, or what other hurdles have to be jumped over, it will be interesting to see, but it is not going to be easy," he says.
Meanwhile, Chi-X has not given up its ambitions in Australia. Although it has not committed to a formal timeline, the company is likely to enter the Australian market in Q4 next year to coincide with the completion of the supervisory transition, says Mr Lowrey. "Both the regulator and the reserve bank are getting fully organised to allow for competition." And, although many market watchers are under the impression that AXE has shut up shop, Heather Kirkham, a spokesperson for AXE, said in an e-mail: "The recent announcement by the Australian Securities and Investments Commission is very formative, and the New Zealand Stock Exchange and the other AXE shareholders are watching developments with interest" - as are many in the US and Europe who believe the summer's events signal the first seeds of true competition in Asia.
