Challenges for the Asia Pacific in Global Equities Markets Alex Frino University of Sydney.

Challenges for the Asia Pacific in Global Equities Markets

Alex FrinoUniversity of Sydney

The Raison d’être of stock exchanges

1.Liquidity• Bid-ask spread = ask price – bid price

2.↓ cost of capital => ↑ Economic growth

Round trip costs of trading in Australia

Component (bps) Source

ASX Fee 0.3 ASX Annual Report 2011 (whole market)

Brokerage 34.312 of the largest fund managers for 1st half of 2010 (benchmark portolios)

Bid-Ask Spread 35.0 ASX 200 Reuters & Own Calculations

ASX Fee Brokerage Bid-Ask Spread05

10152025303540

Estimate (bps)

3 BIG developments

1.New competing exchanges2.High frequency trading/Algorithmic trading3.Dark liquidity pools

Competing exchanges

= 15% of USA

Competing exchanges

= 15% of USA

= 25% of USA

High Frequency Trading

= largest firm trading in USA

Dark pools

Dark pools = 33% of NASDAQ/25% of NYSE

What do HFT’s and market fragmentation do to liquidity?

2

1

3

4

A securities market

2

1

3

4

6

5

7

8

+ more traders (eg. HFT)

2

1

3

4

6

5

7

8

Fragment the market (eg. dark pools)

Differences between US and other markets

SFE SPI Pit v CME S&P 500 Pit

NASDAQ top 5 stocksApple Inc 1,616,824

Microsoft Corporation 398,734

Google Inc 439,600

Oracle Corporation 243,341

Intel Corporation 341,195

3,039,694

ASX top 5 stocksBHP Billiton 138,127

Rio Tinto 62,767

Commonwealth Bank 59,726

Westpac Bank 48,614

ANZ Bank 47,906

357,140

ASX

1,194,163

Nasdaq v ASXTurnover (US $ millions)

X 3

X 10

US Equities Exchanges v OthersTurnover (US $ millions)

Australian Securities Exchange

Deutsche Börse

Hong Kong Stock Exchange

London Stock Exchange

NA

SDA

Q O

MX

NYSE Euronext (U

S)

NYSE Euronext (Europe)

Singapore Exchange

Tokyo Stock Exchange

0

5,000,000

10,000,000

15,000,000

20,000,000

US Equities Exchanges v OthersAverage turnover stock

Australian Securities Exchange

Deutsche Börse

Hong Kong Stock Exchange

London Stock Exchange

NA

SDA

Q O

MX

NYSE Euronext (U

S)

NYSE Euronext (Europe)

Singapore Exchange

Tokyo Stock Exchange

01,0002,0003,0004,0005,0006,0007,0008,0009,000

US Equities Exchanges v OthersTurnover for 10 biggest stocks

Australian Securities Exchange

Deutsche Börse

Hong Kong Stock Exchange

London Stock Exchange

NASD

AQ O

MX

NYSE Euronext (U

S)

NYSE Euronext (Europe)

Singapore Exchange

Tokyo Stock Exchange

0500,000

1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,0005,000,000

Effect of HFT on markets: the evidence

ASX: Proportion of trades involving HFT

30/10/200630/01/2007 2/5/2007 30/07/200724/10/200724/01/200824/04/200823/07/200817/10/200816/01/200917/04/200916/07/200912/10/200940

45

50

55

60

65

70

75

80

85

Per

cen

t (%

)

Source: ASX/Capital Markets CRC Limited

NASDAQ: Proportion of take volume

21

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

9:35

9:55

10:15

10:35

10:55

11:15

11:35

11:55

12:15

12:35

12:55

13:15

13:35

13:55

14:15

14:35

14:55

15:15

15:35

15:55

Non-HFT HFT

Source: NASDAQ/Capital Markets CRC Limited

ASX: Take ratio around earnings announcements

22 CMCRC 2011

Effect of HFT on stock markets: summing up

Effect of market fragmentation: Empirical evidence

What will happen to bid-ask spreads if trading volume fragments in Australia?

log (𝐵𝑖𝑑 𝐴𝑠𝑘𝑆𝑝𝑟𝑒𝑎𝑑%𝑡 )=𝑎+𝑏 log (𝑉𝑜𝑙𝑢𝑚𝑒)𝑡+𝑐 (𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦 )𝑡+𝑡❑

b = elasticity coefficient = what happens to spreads for a 1 (100% change in Volume)

Using data for:i. Top 200 and 300 stocksii. For last 3 years (1 Jan 2009 to 31 December 2011)iii. Data sourced from Reuters (TRTH) and Bloomberg

Elasticity Coefficients ASX

Stock Bid-Ask Spread 2011Estimated Elasticity

Coefficient

Average

ASX300 0.58% -0.15

ASX200 0.35% -0.13

Market Cap Weighted

ASX300 0.18% -0.12

ASX200 0.16% -0.12

…. what will happened to the cost of trading on ASX for different levels of fragmentation

StocksElasticity

CoefficientBid-askSpread

ASX 200 -0.13% 0.35%

Effect on bid-ask spread if volume fragments:

-10% -20% -30% -40% -50%

Percent Change (%) 0.013 0.026 0.039 0.052 0.065

BAS Change (bps) 0.5 0.9 1.4 1.8 2.3

Elasticity coefficients for different groups of stocks: ASX

Top 50 Top 100 Top 200 Top 300

-0.16

-0.14

-0.12

-0.1

-0.08

-0.06

-0.04

-0.02

0

Confirmation that dark liquidity is already impairing bid-ask spreads in Australia …

log (𝐵𝑖𝑑 𝐴𝑠𝑘𝑆𝑝𝑟𝑒𝑎𝑑%𝑡 )=𝑎+𝑏 log (𝑉𝑜𝑙𝑢𝑚𝑒)𝑡+𝑐 (𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦 )𝑡+𝑑(𝑂𝑓𝑓 𝑚𝑎𝑟𝑘𝑒𝑡 𝑡𝑟𝑎𝑑𝑖𝑛𝑔%)𝑡+𝑡

❑

● Follows methodology in Weaver, D. (2012), “Off exchange reporting and Market Quality”, Working Paper Rutgers University for US markets.

● d = coefficient measures impact on bid-ask spreads from increase in off market trading (dark liquidity)

● Using data for:i. All stocks in All Ordinaries Indexii. Data is for October 2010iii. Data sourced from Reuters (TRTH) and Bloomberg

Confirmation that dark liquidity is already impairing bid-ask spreads in Australia …

Spreads (%) Price ($) Volatility (%) Trades per stock per day Mean 0.00967256 4.74691 0.004120028 1106.253007Std dev 0.00961018 9.57191 0.002585756 1995.544504

Market Segment Intercept Volume volatility %TRFAdjusted R squared

ALL ORDS 0.01006 -1.11E-03 2.1175 0.07007 0.5465n=483 3.75*** -5.8*** 17.47*** 9.54***

…. what about other markets?

ASX

DB

HKSE

LSE

NA

SDA

Q

NYSE

PArisEuro

SGX

TSE

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

Average elasticity coefficients - 10 largest stocks

Effect of market fragmentation on liquidity: Summing up

We follow, but is the same medicine good for us?