Instinet, the 11th largest institutional broker of Australian assets and biggest agency-only player, can now continue its calls for ‘best execution’ legislation from a desk in Sydney, after it received full ASX membership last month. The fee-bundled, uncompetitive nature of the Australian broking market is best illustrated by the difference in market share concentrations between Australia and Hong Kong, from where Instinet had previously serviced Australian and foreign investors in the ASX, according to Instinet’s Asia CEO, Glenn Lesko. In Australia, the top 10 institutional brokers have 75 per cent market share, but in Hong Kong the top 35 brokers perform only 50 per cent of trades through the HKEX, he said.
“That shows you how comfortable they are, because they are getting away with practices – like charging a commission that bundles not only execution, but access to deal flow and research – that haven’t been seen for 10 or 15 years in other markets, and are in fact now illegal in the US and Europe,” Lesko said. Instinet’s chief operating officer for Asia, John Fildes, said funds managers would notice no difference in Instinet execution following the move of traders from Hong Kong to Sydney, acknowledging the full ASX membership was a client-servicing and client-attraction play.
“There are strong relationships between the funds managers and the same brokers they all use here… it means our guys can go and have a beer with [the managers] and tell the agency-only story.” Instinet were heartened by last year’s transferral of market supervision powers from the ASX to ASIC, which could be interpreted as a step towards allowing alternative execution venues to settle trades in Australia. Lesko thought the introduction of choices beyond the ASX would make investors pay more attention to the concept of “best execution”, although he maintained that Australia had a unique opportunity to introduce legislation which could learn from the mistakes of the European and US “best execution” regimes, MiFid and Reg NMS respectively.
For example, under Reg NMS the focus on “best available price” comes at the expense of investors being able to “right-size” the volume of a stock they wish to trade, while Europe lacks a “universal ticker” similar to the National Best Bid & Offer system in the US, leading to a high rate of trades which fail to achieve “best execution”. One of the alternative venues which will apply for an Australian licence if it’s allowed is Chi-X, a fellow division with Instinet in Instinet Incorporated, which is in turn a subsidiary of Nomura Holdings. Another contender is Liquidnet, a direct competitor to Instinet as an agency-only broker and global operator of dark pools.