PLATYPUS SYMPOSIUM MARKET MICROSTRUCTURE ISSUES IN AUSTRALIAN - - PowerPoint PPT Presentation

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PLATYPUS SYMPOSIUM MARKET MICROSTRUCTURE ISSUES IN AUSTRALIAN - - PowerPoint PPT Presentation

Feb 25, 2024 631 likes •849 views

PLATYPUS SYMPOSIUM MARKET MICROSTRUCTURE ISSUES IN AUSTRALIAN EQUITIES Professor Carole Comerton-Forde University of Melbourne Market microstructure issues in Australian equities Carole Comerton-Forde Professor of Finance 4 March, 2014

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PLATYPUS SYMPOSIUM

MARKET MICROSTRUCTURE ISSUES IN AUSTRALIAN EQUITIES Professor Carole Comerton-Forde University of Melbourne

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www.fbe.unimelb.edu.au

Market microstructure issues in Australian equities

Carole Comerton-Forde Professor of Finance 4 March, 2014

www.fbe.unimelb.edu.au

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www.fbe.unimelb.edu.au

Overview

  • Evolving market structure

− Competition − Dark trading − High Frequency Trading

  • Impact of changes on market quality
  • What does it mean for investors?
  • Expected future trends
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Competition

  • Market has become more complex
  • Two exchanges:

− ASX: 3 order books: 2 lit, 1 dark − Chi-X: 1 order book with lit and dark order types

  • 19 broker-operated crossing systems

− Multi-lateral connections (aggregators) − Bi-lateral connections

  • Lit exchanges set NBBO
  • Priority not always “price then time”
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Where are trades done?

Total order book 72.2%

Pre-competition from Chi-X Post-competition from Chi-X

Source: ASIC Equity Market Data, Dec 2013 and TRTH

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Where are trades done?

Total order book 72.2%

Pre-competition from Chi-X Post-competition from Chi-X

Source: ASIC Equity Market Data, Dec 2013 and TRTH

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Growth in dark trading

  • Two types of dark trading:

− Blocks (>$1million) − Below block size dark trades

  • Launch of ASX Centre Point, broker operated crossing

systems and dark algorithms facilitated growth in below block size dark trades

  • Concerns about too much below block dark trading harming

price discovery and liquidity

  • New regulations introduced May 27, 2013
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Dark trading rule changes introduced May 27, 2013

Dark and block trading

Source: ASIC Equity Market Data, Dec 2013

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Market fragmentation

Source: ASIC Equity Market Data, Dec 2013

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What is HFT?

  • HFT is not a single trading strategy
  • Uses high-speed computer programs to generate, route

and execute orders

  • Characterised by:

− Large volumes of orders, amendments and cancellations − Small positions, high turnover, low margins − Very short holding periods − Typically (but not always) zero inventory overnight

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Criteria Australia US Low latency   Fragmentation 2 exchanges 1 licensed dark pool 19 crossing systems 14 exchanges > 50 ATSs > 200 broker-dealers Low explicit fees  Competition reduced fees  Cost recovery fee  Rebates prohibited  Intense fee competition  Rebates paid High liquidity  ASX200 stocks & ETFs  Large universe of liquid stocks & ETFs Small tick sizes  Many high tick stocks / tick constrained stocks  Large universe of low tick stocks Order protection  Best execution  Level of HFT 2012 Est. 27% 2009 Est. 70%; 2012 Est. 50%

HFT Friendliness: Australia vs the US

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ASIC HFT Taskforce

Analysis of HFT vs non-HFT trading

HFT Non-HFT Percentage of traders <0.1% >99.1% Percentage of turnover 27% 73% Order to trade ratio 13.7 4.1 Speed of deletion 27ms 31ms Speed of amendment 23ms 9ms % orders below $500 17% 83% Fraction of orders resting < 1 min 81% 78% Fraction of orders resting < 1 sec 35% 16%

Source: ASIC Report 331

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What has happened to market quality?

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Average order size

Source: ASIC Equity Market Data, Dec 2013

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Order to trade ratios

Source: ASIC Equity Market Data, Dec 2013

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Average quoted spreads

Source: ASIC Equity Market Data, Dec 2013

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Inter-day volatility

Source: ASIC Equity Market Data, Dec 2013

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What does it mean for investors?

  • Understanding trading and managing the execution process

is critical

  • Need to understand order types, order routing and broker

incentives

  • Transaction cost analysis (TCA), including venue analysis is

essential

  • Need to contribute to market structure debate and

regulation

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Expected future trends

  • More variation in how people search for and interact with

liquidity

  • Further attempts to segment liquidity and preference

specific types of order flow

  • Attempts to create incentives of liquidity provision
  • Greater provision of tools to support TCA
  • Proposed move to T+2 settlement
  • Consideration of competition in clearing
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Questions?

Carole Comerton-Forde Professor of Finance