challenges for the asia pacific in global equities markets alex frino university of sydney
TRANSCRIPT
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
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
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
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