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

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Presentation on theme: "Challenges for the Asia Pacific in Global Equities Markets Alex Frino University of Sydney."— Presentation transcript:

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

2 The Raison dêtre of stock exchanges 1.Liquidity Bid-ask spread = ask price – bid price 2. cost of capital => Economic growth

3 Round trip costs of trading in Australia Component(bps)Source ASX Fee0.3ASX Annual Report 2011 (whole market) Brokerage34.3 12 of the largest fund managers for 1st half of 2010 (benchmark portolios) Bid-Ask Spread35.0ASX 200 Reuters & Own Calculations

4 3 BIG developments 1.New competing exchanges 2.High frequency trading/Algorithmic trading 3.Dark liquidity pools

5 Competing exchanges = 15% of USA

6 Competing exchanges = 15% of USA = 25% of USA

7 High Frequency Trading = largest firm trading in USA

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

9 What do HFTs and market fragmentation do to liquidity?

10 2 2 1 1 3 3 4 4 A securities market

11 2 2 1 1 3 3 4 4 6 6 5 5 7 7 8 8 + more traders (eg. HFT)

12 2 2 1 1 3 3 4 4 6 6 5 5 7 7 8 8 Fragment the market (eg. dark pools)

13 Differences between US and other markets

14 SFE SPI Pit v CME S&P 500 Pit

15 NASDAQ top 5 stocks Apple Inc1,616,824 Microsoft Corporation398,734 Google Inc439,600 Oracle Corporation243,341 Intel Corporation341,195 3,039,694 ASX top 5 stocks BHP Billiton138,127 Rio Tinto62,767 Commonwealth Bank59,726 Westpac Bank48,614 ANZ Bank47,906 357,140 ASX 1,194,163 Nasdaq v ASX Turnover (US $ millions) X 3 X 10

16 US Equities Exchanges v Others Turnover (US $ millions)

17 US Equities Exchanges v Others Average turnover stock

18 US Equities Exchanges v Others Turnover for 10 biggest stocks

19 Effect of HFT on markets: the evidence

20 ASX: Proportion of trades involving HFT Source: ASX/Capital Markets CRC Limited

21 NASDAQ: Proportion of take volume 21 Source: NASDAQ/Capital Markets CRC Limited

22 ASX: Take ratio around earnings announcements 22CMCRC 2011

23 Effect of HFT on stock markets: summing up

24 Effect of market fragmentation: Empirical evidence

25 What will happen to bid-ask spreads if trading volume fragments in Australia? b = elasticity coefficient = what happens to spreads for a 1 (100% change in Volume) Using data for: i. Top 200 and 300 stocks ii. For last 3 years (1 Jan 2009 to 31 December 2011) iii. Data sourced from Reuters (TRTH) and Bloomberg

26 Elasticity Coefficients ASX StockBid-Ask Spread 2011 Estimated Elasticity Coefficient Average ASX3000.58%-0.15 ASX2000.35%-0.13 Market Cap Weighted ASX3000.18%-0.12 ASX2000.16%-0.12

27 …. what will happened to the cost of trading on ASX for different levels of fragmentation Stocks Elasticity Coefficient Bid-ask Spread ASX 200-0.13%0.35% Effect on bid-ask spread if volume fragments: -10%-20%-30%-40%-50% Percent Change (%)0.0130.0260.0390.0520.065 BAS Change (bps)0.50.91.41.82.3

28 Elasticity coefficients for different groups of stocks: ASX

29 Confirmation that dark liquidity is already impairing bid-ask spreads in Australia … 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 Index ii. Data is for October 2010 iii. Data sourced from Reuters (TRTH) and Bloomberg

30 Confirmation that dark liquidity is already impairing bid-ask spreads in Australia … Spreads (%)Price ($)Volatility (%)Trades per stock per day Mean0.009672564.746910.0041200281106.253007 Std dev0.009610189.571910.0025857561995.544504 Market SegmentIntercept Volumevolatility%TRF Adjusted R squared ALL ORDS0.01006-1.11E-032.11750.070070.5465 n=4833.75*** -5.8***17.47***9.54***

31 …. what about other markets?

32 Effect of market fragmentation on liquidity: Summing up

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


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