Australian Securities Exchange (ASX)

The Australian Securities Exchange (ASX), the primary stock exchange group in Australia, was created in July 2006 when the Australian Stock Exchange and the Sydney Futures Exchange merged to form one entity.

ASX, ranked as world’s 10^th largest in terms of market capitalization, is a vertically integrated exchange group. It offers trading products across various asset classes along with primary and secondary market services that include trading and investing, price and volume discovery and raising, allocation and hedging of capital flows. Central counterparty risk transfer is offered via subsidiaries of ASX Clearing Corporation and transaction settlement for fixed income markets and equities through subsidiaries of ASX Settlement Corporation.

The Australian Securities Exchange operates as a market functionary, clearing house and a securities depository. Its range of services includes promotion of corporate governance among listed companies in Australia and education of retail investors.

The ASX has a fairly diverse base of domestic and international customers that includes corporation and trusts that have a wide variety of securities and financial instruments listed on the ASX along with investment banks, hedge funds, fund managers, brokers and proprietary traders, vendors of market data, commodity trading advisers and retail investors. It is also associated with other listing and trading venues.

The long term success of ASX is attributed to its supervision of compliance to its operating rules. The underlying support is provided by its full-owned subsidiary, ASX Compliance, which ensures that the activities of ASX as a market operator are monitored properly and compliance to its operating rules is strictly enforced.

Regulation undertaken by the market regulator, the Australian Securities and Investment Commission (ASIC) ensures investor confidence in the companies within the ASX group. Also, supervision by the Reserve Bank of Australia of the group’s clearing and settlement facilities ensures stability of ASX’s financial system. The ASIC also supervises ASX’s Compliance as a public company with its Listing Rules.

Apart from direct trading in shares of listed companies, ASX offers for trade products relating to futures contracts, options, warrants, CFDs (contracts for difference), ETFs (Exchange Traded Funds), real estate investment trusts, interest rate securities and listed investment companies.

Indices and Biggest Shares

In terms of market capitalization, the following are among the largest listed companies traded on the Australian Securities Exchange.

• BHP Billiton
• Commonwealth Bank of Australia
• Westpac
• Telstra Corporation
• Rio Tinto
• National Australia Bank
• Australia and New Zealand Banking Group

The financial sector with 36%, metal and mining with 22% and consumer products with 13% were the three top sectors in terms of market capitalization.

Comprising of the top 200 shares, the S&P ASX 200 is the benchmark index of the ASX. The ASX 200 replaced the earlier All Ordinaries index, which still runs as a parallel index and commonly quoted together. Two other significant indices comprising of bigger stocks are ASX 100 and ASX 50.

Mr. Elmer Funke Kupper was appointed as managing director and CEO in October 2011. Prior to that, Mr. Kupper was managing director and CEO of Tabcorp from September 2007 to June 2011.

Details of ASX Market

The ASX Group is a vertically integrated exchange group that offers products across multiple asset classes. It provides primary as well as secondary services through its subsidiaries.

• Australian Securities Exchange: Apart from a platform for trading in various financial instruments, its services include raising, allocation and hedging of capital flows and price discovery.
• ASX Clearing Corporation: An ASX subsidiary, this entity acts as a central counterparty risk transfer service.
• ASX Settlement Corporation: This subsidiary handles procedures for settlement of securities in both equity and fixed income markets.

ASX operations are performed on two platforms, clearing and settlement platform. One functions as an integrated platform (from 10.00 am to 4.00 pm AEST) for trading in equities and equity related derivatives products. The second offers for trading a suite of derivatives products across markets such as interest rate, equity indices, commodity futures and options along with CFDs (contracts for difference) on a globally distributed platform that operates all through the day.

Compliance with its operating rules is monitored and enforced by one of its other subsidiaries, ASX Compliance.

The ASX Group is a recognized exchange, which means that all operations, including those of its subsidiaries are regulated by the market watchdog, the government sponsored ASIC along with oversight by the Reserve Bank of Australia.

The pre-market session starts at 7.00 am and ends before the opening bell at 10.00 am. The first ten minutes are devoted to single-price auctions performed alphabetically, with a built-in mechanism to prevent exact prediction of first trades. Single-price auctions also take place after the closing bell, between 4.10 pm and 4.12 pm for arriving at the daily closing prices.

There were 2,192 stocks having market capitalization of AUD 1.4 trillion listed on ASX as of October 30, 2010. As of that date, it was the 6^th largest equity market in the world on free float basis with approximately 3.4% of the S&P BMI and 3.2% of the MSCI World index. In 2010 the average daily turnover on ASX was AUD 5.5 billion.

History

The history of ASX starts from the time when six separate exchanges were founded in state capitals:

• 1861: Melbourne, Victoria
• 1871: Sydney, NSW
• 1882: Hobart, Tasmania
• 1884: Brisbane, Queensland
• 1887: Adelaide, WA

Another exchange at Launceston, Tasmania merged into the Hobart exchange.

All the six exchanges held their first conference in 1903 and ever since, until 1937, the exchanges continued to meet informally. In 1937 the Australian Associated Stock Exchange (AASE) was established. AASE had representatives from each exchange and over time, it laid down uniform rules for listing, broker rules and commission rates.

Initially, trading was conducted by exchange employees through a call system with the name of each company being called out and brokers bid for or offered on each stock. By 1960s, the system was changed and employees, who came to be called ‘chalkies,’ wrote bids and offers on blackboards with chalks.

As a result of an act of the Australian parliament, the Australian Stock Exchange Limited was established in 1987 enabling the amalgamation of the six provincial stock exchanges operating in different state capitals. In October 1998 after its demutualization, the amalgamated exchange became the first exchange in the world that had its own shares listed on its own platform. Eventually, in July 2006, Australian Stock Exchange Limited merged with the holding company of Sydney Futures Exchange, the SFE Corporation to form the ASX as it is known today.

Chronology of Significant Events

1969-1970: The Poseidon Bubble, named after the company Poseidon NL, which announced discovery of a nickel mining site in Western Australia. The news triggered a boom in mining shares, which eventually crashed in January 1970. The regulatory rules contained in the Australia’s national companies and securities legislation are the direct result of bursting of the Poseidon Bubble.

1976: Trading in call options launched.

1980: Melbourne and Sydney indices replaced by ASX indices.

1984: deregulation of broker fees results in a significant fall in commissions, which are now in the range of 0.05% (offered by discount online brokers) to 0.12%.

1987: Six separate exchanges merge to form Australian Stock Exchange Limited as a result of the work that began in 1985. Also, SEATS, the all electronic trading system is introduced, initially for a few stocks.

1990: Trading floors are closed after all stocks are moved to SEATS trading system. Also, a warrants market is launched.

1993: Fixed interest rate market is launched. Also, an accelerated system of settlement, FAST, is introduced, which is replaced by CHESS the following year.

1994: Sydney Futures Exchange starts trading in futures of stocks listed on the ASX. The ASX offers a competitive product, the Low Exercise Price Option (LEPO). SFE takes ASX to court claiming that LEPOs were futures. The court rules in favor of ASX and LEPOs are introduced in 1995.

1995: The government slashes stamp duty from 0.3% to 0.15%. In 2000, with the introduction of GST, stamp duty is abolished eliminating the need to locate staff in different states to benefit from differing rates of stamp duty.

1996: Exchange members vote in favor of demutualization and the ASX Limited is incorporated and listed on ASX itself in 1998.

1997: Electronic trading in the option market commences and so does the phased transition of the derivatives market to the electronic CLICK system.

2000: Acquisition of 15% stake in IRESS, a trading and order management software company.

2001: Stamp duty on tradable securities abolished.

2006: ASX merges with Australia’s primary exchange for derivatives trading, the Sydney Futures Exchange.

2010: ASX announces that it will merge with the Singapore Exchange.

2011: Permission for the proposed merger is not granted as Treasurer Wayne Swan finds the merger as not in the best interests of the country.

Trading Systems

Since November 29, 2010, all equity products of ASX are traded on ASX Trade, an ultra low latency electronic trading platform based on NASDAQ OMX’s Genium INET system. Trading platforms supplied by NASDAQ OMX are in use at many exchanges around the world.

Settlement

Shares are held by investors in two forms. Both are dematerialized forms of holding, which means that there are no physical share certificates.

• Shares are held by the issuing company by way of an entry in the share registry. The investor is provided with a security-holder reference number that is quoted while selling.
• Shares may be in the CHESS system or Clearing House Electronic Sub-register System. The broker sponsors the investor, who gets a holder identification number (HIN) from the CHESS system, which sends a monthly statement whenever there is some activity in the investor’s account.

Shares held by an investor may be moved from one form of holding to another and between brokers.

Going Short – Short Selling

ASX allows short selling or selling without prior ownership in certain designated stocks with the condition that brokers and trading participants must report gross short selling to ASX on daily basis. The report is to be the aggregate of short sales for each individual stock. On its part, the ASX publishes the aggregate of short sales reported by different trading participants.

Some brokers do not offer the facility of short selling to small investors. Small investors can however short sell by trading in LEPOs and/or contracts for difference (CFDs) offered by third party providers.

The market regulator, the Australian Securities and Investment Commission, suspended almost all types of short selling in September 2008 on fears of market instability due to the global financial crisis. However, it lifted the ban on covered short selling in May 2009. In addition, the ASX introduced the Settlement rule 10.11.12, which states that if an investor was unable to provide stocks on settlement day, the investor’s clearer must cover the same from the market.

As per the Settlement Rule 10.11.12, if there is a Failed Settlement Shortfall on T+5, the second business day after the day on which the Rescheduled Batch Instruction was scheduled for settlement, the settlement participant responsible for delivering must:

• Purchase the relevant number of the relevant financial product and close the Failed Settlement Shortfall, or
• Use the securities lending arrangement to acquire the relevant number of the relevant financial product and deliver in Batch Settlement no more than two business days later.

Trading in Options

ASX offers trading in options with standardized lots and strike prices and expiry dates on leading shares listed on the exchange. Market makers provide liquidity and are also responsible for providing quotes on options for two or more stocks assigned to them. A stock may have multiple market makers who can compete with each other. Market makers may choose to:

• Create a market for the stock continuously on a set of 18 options and/or
• Create a market in response to a quote, in any option up to 9 months out.

In either case, depending upon the stock, the minimum quantity offered for trade is 5 or 10 and there is also a maximum permitted spread. Clients may buy (take) or sell (write) options. If a trader writes an option, s/he must put up margin money before creating a position. Since option trading is considered to be more risky, brokers need to exercise caution before allowing clients to trade in options.

Interest Rate Market

The interest rate market is perhaps the most misunderstood market. It is basically a market where trading is done in exchange listed interest-bearing financial instruments such as corporate bonds, floating rate notes and preference shares (which are almost similar to bonds). Trading is on the same lines as that of normal stock trading. However, in the case of the interest rate market, the ASX publishes information such as maturity date, effective interest rate, etc to enable comparison.

Futures

Before merger with Australian Stock Exchange Limited, the Sydney Futures Exchange was the 10^th biggest derivatives exchange in the world that provided derivative products in the four most actively traded markets. Now a part of ASX, the derivatives products offered for trade include futures and options in interest rates, equities, currencies and commodities including wool and cattle. Currently, the most actively traded futures contracts are:

• SPI 200 Futures Contracts: SPI 200 is an index comprising of 200 largest stocks on the Australian Stock Exchange in terms of market capitalization.
• AU 90-day Bank Accepted Bill Futures Contracts: This is Australia’s equivalent of T-Bill or (Treasury bill) futures.
• 3-Year Bond Futures Contracts: Futures contracts of Australian 3-year bonds.
• 10-Year Bond Futures Contracts: Futures contracts of Australian 10-year bonds.

ASX also offers futures contracts for ASX 50, ASX 200 and ASX property indices and commodities such as grain, electricity and wool and options over grain futures.

Market Indices

In collaboration with Standard & Poor’s, the ASX maintains stock indices reflecting the value of stocks traded on its platforms. The S&P/ASX 20, S&P/ASX 50, S&P/ASX 100,S&P/ASX 200 and S&P/ASX 300 indices comprise of the largest 20, 50, 100, 200 and 300 companies (in terms of market capitalization) listed on the exchange.

ASX Share Market Game

The ASX provides an opportunity to beginners to gain trading experience. Somewhat similar to demo accounts offered by many online brokers, the ASX Share Market Game allows players to trade in virtual money at current market prices. Players get an initial amount of $ 50,000 for investing in the stock market. During the course of the game, players buy and sell shares and track their trades to see how many of them were winning or losing trades.

Supervision

The onus of supervising real time trading in Australia’s licensed domestic financial markets, the conduct of market participants (mostly brokers) and the relationship between brokers and their clients was transferred to ASIC on August 1, 2010.

However, the entry of a regulatory and supervising body did not change ASX’s existing supervisory set up of oversight of listed entities in the group or the rules governing operations of ASX’s clearing and settlement operators. The ASX retained its subsidiary company that was earlier, and now also, responsible for monitoring and enforcing compliance to its operating rules.

Enforcement of compliance was earlier the function of ASX Market Supervision. However, the name was changed to ASX Compliance in order to truly reflect the company’s role. ASX Compliance is an ASX subsidiary company that ensures compliance to rules by each of the entities under the ASX Group.

Merger Talks with Singapore Exchange

ASX set upon an ambitious plan to create an exchange with a market value of US$ 14 billion and started merger talks with the Singapore Exchange in October 2010. However, the merger was blocked by the Federal Treasurer on the plea that it was not in the country’s best interest.