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Challenges for the Asia Pacific in Global Equities Markets

Challenges for the Asia Pacific in Global Equities Markets. Alex Frino University of Sydney. The Raison d’être of stock exchanges. Liquidity • Bid-ask spread = ask price – bid price ↓ cost of capital => ↑ Economic growth. Round trip costs of trading in Australia. 3 BIG developments.

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Challenges for the Asia Pacific in Global Equities Markets

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

  2. The Raison d’être of stock exchanges • Liquidity • • Bid-ask spread = ask price – bid price • ↓ cost of capital => ↑ Economic growth

  3. Round trip costs of trading in Australia

  4. 3 BIG developments New competing exchanges High frequency trading/Algorithmic trading 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 HFT’s and market fragmentation do to liquidity?

  10. A securities market 2 1 3 4

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

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

  13. Differences between US and other markets

  14. SFE SPI Pit v CME S&P 500 Pit

  15. Nasdaq v ASX Turnover (US $ millions) X 3 X 10

  16. US Equities Exchanges v OthersTurnover (US $ millions)

  17. US Equities Exchanges v OthersAverage turnover stock

  18. US Equities Exchanges v OthersTurnover 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 Source: NASDAQ/Capital Markets CRC Limited

  22. ASX: Take ratio around earnings announcements 22 CMCRC 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

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

  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 …

  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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