Chi-X has clearly announced its intentions for Australia. It aims to repeat what it has done in the US and Europe: provide faster trading and lower fees than traditional exchanges. This makes quantitative, high-frequency traders its natural clientele. Peter Fowler, Chi-X Australia’s chief operating officer, expects the new trading venue to be executing orders by October, once it has adjusted to the market regulator’s new integrity rules. The company’s operations in Canada and Europe “showed the importance of attracting liquidity through high frequency players coming out of the US and continental Europe,” Fowler says. “We hope to attract them into Australia.” This means providing lowlatency trades, which cuts the time lapse between submitting an order taken and acknowledgement, and co-location, which offers asset managers and brokers the ability to run trading algorithms through computer servers within the trading venue.
These services were first brought to market by Nasdaq in 2005, and since then, high-frequency trading in global markets has evolved into a game of milliseconds. Between 30 per cent and 50 per cent of global trading turnover is driven by quantitative, or ‘blackbox’, trading, says Brian Brown, a former head of pan-Asia systematic trading with Morgan Stanley in Hong Kong. He is also the author of Chasing the Same Signals, a book describing the influence of cybertrading on global markets. He says the new trading technologies run by managers and venues “allows quant funds to compete against banks and the traditional businesses of market making, which you couldn’t do five years ago”. The development of parallel trading venues in Australia should lure US and European quantitative managers to extend their operations and compete against domestic banks as liquidity providers.
“They won’t compete in all the liquid names with the banks, but further down the food chain where it’s less covered.” The ASX is also preparing for the arrival of high-frequency traders in Australia by developing parallel execution platforms. Firstly, it is phasing out its integrated equity and derivatives trading system (ITS) and developing a new platform, TradeMatch, that Richard Murphy, general manager of equity markets at the bourse, says will provide more capacity for higher trading volumes – and, of course, lower latency. It is the ASX’s adaptation to global trading practice, in which “order to trade ratios have blown out dramatically, the capacity needs of exchanges have blown out dramatically and timeframes have come down from seconds to milliseconds to microseconds,” Murphy says. Today, the ITS offers latency of between two and five milliseconds. Its successor will provide latency of between two and five microseconds, accelerating the speed of execution by a multiple of 10. It will also boost execution capacity five-fold to exceed 5 million trades, and 500 million order book changes each day.
