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Australian Securities Exchange

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ASX Limited
Company typePublic (ASX: ASX)
ISINAU000000ASX7 Edit this on Wikidata
IndustrySecurities markets
Founded1987, but dating back to 1861
HeadquartersAustralia Sydney, Australia
Key people
Maurice Newman (Chair)
Robert Elstone (Managing Director)
RevenueIncrease $279.7 million AUD (Y.E. 30 June 2005)
Number of employees
492 (30 June 2005) [1]
Websitewww.asx.com.au

The Australian Securities Exchange (ASX) is the primary stock exchange in Australia. The ASX began as separate state-based exchanges established as early as 1861. Today trading is all-electronic and the exchange is a public company, listed on the exchange itself.

The Australian Securities Exchange as it is now known resulted from the merger of the Australian Stock Exchange and the Sydney Futures Exchange in December 2006.

The biggest stocks traded on the ASX, in terms of their market capitalization, include BHP Billiton, Commonwealth Bank of Australia, Telstra Corporation, Rio Tinto, National Australia Bank and Australia and New Zealand Banking Group. As at 31-Dec-2006 the three largest sectors by market cap were financial services (34%), commodities (20%) and listed property trusts (10%).

The major market index is the S&P/ASX 200, an index made up of the top 200 shares in the ASX. This supplanted the previously significant All Ordinaries index, which still runs parallel to the S&P ASX 200. Both are commonly quoted together. Other indices for the bigger stocks are the S&P/ASX 100 and S&P/ASX 50.

The ASX is a public company, and its own shares are traded on the ASX. However, the corporation's charter restricts maximum individual holdings to a small fraction of the company.

While the ASX regulates other listed companies listed on the ASX, it cannot regulate itself, and is regulated by the Australian Securities and Investments Commission (ASIC).

The current managing director Robert Elstone was appointed in July 2006. Prior to the merger of ASX with the Sydney Futures Exchange (SFE), Robert Elstone was the CEO of the SFE.

Market Details

Normal trading is weekdays 10:00am to 4:00pm AEST or AEDT.[1] The market opens alphabetically in single price auctions, phased over the first ten minutes, with a small random time built in to prevent exact prediction of the first trades. There is also a single-price auction between 4:10pm and 4:11pm to set the daily closing prices. As of 30 March 2007, 2014 stocks were listed on the ASX with a total market capitalisation of A$1.39 trillion (US$1.098 trillion). At the end of 2004 it was the 8th largest world equity market (on free float basis), comprising around 2.2% of the MSCI World index. Market turnover during 2004 was $A779bn.

As of October 30 2007 the all ordinaries stood at 6757.

Brokers that dominate market share in Australia (in decreasing order) include Macquarie Bank, UBS, Citigroup, Goldman Sachs JBWere, Merrill Lynch, CSFB, Deutsche Bank, ABN AMRO, CommSec and Morgan Stanley. Retail investors account for around 20% of market turnover. Market ownership is broken down as 30% institutional, 40% foreign, 30% retail.

History

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The exchange began as six separate exchanges established in the state capitals Melbourne (1861), Sydney (1871), Hobart (1882), Brisbane (1884), Adelaide (1887) and Perth (1889).[2] An exchange in Launceston merged into the Hobart exchange too.

The first interstate conference was held in 1903 at Melbourne Cup time. The exchanges then met on an informal basis until 1937 when the Australian Associated Stock Exchanges (AASE) was established, with representatives from each exchange. Over time the AASE established uniform listing rules, broker rules, and commission rates.

Trading was conducted by a call system, where an exchange employee called the names of each company and brokers bid or offered on each. In the 1960s this changed to a post system. Exchange employees called "chalkies" wrote bids and offers in chalk on blackboards continuously, and recorded transactions made.

In 1969 there was a mining boom, triggered by Poseidon NL discovering nickel in Western Australia. See the Poseidon bubble article.

In 1976 the Australian Options Market was established, trading call options.

In 1980 the separate Melbourne and Sydney stock exchange indices were replaced by Australian Stock Exchange indices.

In 1984 broker's commission rates were deregulated. Commissions have gradually fallen ever since, with today rates as low as 0.12% or 0.1% from discount internet-based brokers.

In 1987, following work begun in 1985, the separate exchanges merged to form the ASX. Also in 1987 the all-electronic SEATS trading system (below) was introduced. It started on just a limited range of stocks, progressively all stocks were moved to it and the trading floors were closed in 1990.

In 1990 the warrants market (below) was established.

In 1993 fixed interest securities were added (see interest rate market below). Also in 1993 the FAST system of accelerated settlement was established, and the following year the CHESS system (see settlement below) was introduced, superseding FAST.

In 1994 the Sydney Futures Exchange announced futures over individual ASX stocks. The ASX responded with low exercise price options (see below). The SFE went to court,[3][4] claiming LEPOs were futures (certainly their effect is like futures) and therefore the ASX could not offer them. But the court held they were options and so LEPOs were introduced in 1995.

In 1995 stamp duty on share transactions was halved from 0.3% to 0.15%. The ASX had agreed with the Queensland State Government to locate staff in Brisbane in exchange for the stamp duty reduction there, and the other states followed suit so as not to lose brokerage business to Queensland. In 2000 stamp duty was abolished in all states as part of the introduction of the GST.

In 1996 the exchange members (brokers etc) voted to demutualize. The exchange was incorporated as ASX Limited and in 1998 the company was listed on the ASX itself. The ASX arranged with the Australian Securities and Investments Commission to have it enforce listing rules for ASX Limited.

In 1997 a phased transition to the electronic CLICK system for derivatives began.

In 2006 the ASX announced a merger with the Sydney Futures Exchange, the primary derivatives exchange in Australia.

ASX regulation

ASX and the Australian Securities and Investments Commission (ASIC) "co-regulate" ASX. There are at least 20 examples of co-regulation:

  1. As a licensed market, ASX has legal obligations under Corporations Act 2001 (Cth) (Part 7.1, Div 3) to run a market which is "fair, orderly and transparent".
  2. ASX must give information to ASIC regarding listed companies: s 792C.
  3. ASX must assist ASIC: s 792D.
  4. ASX must give ASIC access to the market: s 792E.
  5. ASX can "refer" matters to ASIC for further investigation.
  6. ASX must lodge an annual compliance report with ASIC: s 792F.
  7. ASX's Operating Rules are binding in contract: s 793B.
  8. ASIC must be informed of any changes to ASX Operating Rules: s 793D.
  9. ASX's Operating Rules may be disallowed by the Minister (Treasury): s 793E.
  10. ASIC has oversight of all market licensees including ASX.
  11. ASX must notify ASIC of disciplinary actions it takes against participants: s 792B.
  12. ASX's Operating Rules are enforceable by ASIC, the market licensee (ASX), clearing house or "a person aggrieved": s 793C.
  13. The Minister can give directions to ASX: s 794A.
  14. The Minister can call for a report on specified matters regarding ASX: s 794B.
  15. ASIC must complete an annual assessment of ASX's compliance with the law: s794C.
  16. ASIC can give ASX directions to suspend dealings or some other direction to ensure a fair and orderly market: s 794D.
  17. The Minister may impose conditions on ASX's Australian Market Licence: s 796A.
  18. Since ASX is itself a public company listed on ASX, ASIC regulates ASX.
  19. There are limits on the control of ASX (max 15% ownership by one person): Part 7.4, Div 1
  20. ASX Markets Supervision Pty Ltd, a subsidiary of ASX, is responsible for supervising market operations. It was created to address the perceived conflict between ASX’s regulatory and commercial functions.
  21. ASIC can investigate ASX: Part 3, ASIC Act 2001 (Cth)

SEATS/ITS

Since 2 October, 2006, trading of shares, warrants, fixed-interest securities and company-issued options and rights has been conducted on the Click-XT system, also known as the Integrated Trading System (ITS). The Integrated Trading System provides new opportunities for contingent trading and new order types, can process more transactions per second than the older Stock Exchange Automated Trading System (SEATS), and allows multi-order transactions (up to 5 orders per transaction).


SEATS was an all-electronic order matching system, based on time and price priority. Two types of orders were accepted,

  • Market order, to buy or sell at market.
  • Limit order, to buy at no more than a given price, or to sell at no less than a given price.

Limit orders are the most common. Limit orders not immediately filled are held in the system to be matched against a later order. Such orders remain until a specified expiry date or until cancelled. The exchange automatically cancels orders when a stock goes ex-dividend or ex other entitlements.

There is a minimum price unit for quotations and trades in the system. The creates a minimum spread of that amount between the limit orders of buyers and sellers sitting in the market. For interest rate market securities (below), except redeemable preference shares, the minimum unit is 0.1 cent. For other securities the unit is based on the share price, [2]

Share price Minimum step
< 10 cents 0.1 cent
10 cents–$2.495 0.5 cent
$2.50–$1000 1 cent
> $1000 $1

The market depth, i.e. the set of limit orders held in the market, is shown to all participants. Brokers generally provide this to clients at no extra charge. Market depth shows the quantity of shares bid or offered; except that large orders can optionally have some or all undisclosed. An undisclosed part must be at least $200,000 worth, other participants see it only as "/u". When an order is matched the undisclosed part is reduced first, and once it falls below $200,000 worth the full quantity is disclosed.

Because the system is all-electronic, the delays in entering orders into the system are minimal. Internet-based brokers generally pass client orders straight into the system, with no processing beyond a credit check (this is called Automated Client Order Processing).

Each day's trading begins with a pre-open auction. From 7:00am to 10:00am limit orders may be entered, but are not matched. Then at the open (staggered times from 10:00am to 10:09am according to stock code) the market is uncrossed by establishing an opening price that maximizes the volume transacted. All matches made get that same opening price. A pre-close auction from 4:00pm to 4:10pm establishes a closing price similarly.

There are no market makers or specialists for ordinary shares, transactions are made directly between investors. For warrants (see below) the issuer is required to maintain a bid in the system.

There are no stop loss orders in SEATS. But anyone may of course monitor prices and enter an order on seeing particular price action. In 2003 two online discount brokers Commonwealth Securities and E*Trade Australia introduced conditional orders, which implemented automated stop loss and buy stop.

Settlement

Investors hold shares in one of two forms. Both operate with bank-account style holding statements rather than share certificates.

  • Issuer sponsored. The company's share register administers the investor's holding and issues them with a Shareholder Registration Number (SRN) which may be quoted when selling.
  • Broker sponsored. The investors sharebroker sponsors the client into CHESS, the Clearing House Electronic Subregister System. The investor is given a Holder Identification Number (HIN) and monthly statements are sent to the investor from the CHESS system.

Holdings may be moved from issuer sponsored to broker sponsored or between different brokers on request. For more on CHESS see Australian Clearing House and Electronic Sub-register System.

Short selling

Short selling of shares is permitted on the ASX, but only among designated stocks and with certain conditions,

  • The sell order must be at a price not lower than the last trade.
  • No more than a total 10% of the shares on issue may be sold short. (Brokers report net short positions to the ASX daily.)
  • Margin cover of 20% of the current share price must be posted.

Many brokers don't offer short selling to small private investors. LEPOs (below) can serve as an equivalent. Contracts for difference offered by third party providers are another alternative. Some CFD providers enter orders directly into the SEATS system (instead of making a synthetic market), giving investors the equivalent of exchange trading.

Options

Options over leading shares are traded on the ASX, with standardized sets of strike prices and expiry dates. Liquidity is provided by market makers who are required to provide quotes. Each market maker is assigned two or more stocks. A stock can have more than one market maker, and they compete with one another. A market maker may choose one or both of,

  • Make a market continuously, on a set of 18 options.
  • Make a market in response to a quote request, in any option up to 9 months out.

In both cases there's a minimum quantity (5 or 10 contracts depending on the shares) and a maximum spread permitted.

Due to the higher risks in options, brokers must check clients suitability before allowing them to trade options. Clients may both take (ie. buy) and write (ie. sell) options. For written positions the client must put up margin.

Exchange Traded CFDs - ASX CFDs

ASX CFDS are a new form of contract for difference that will be traded through an exchange based mechanism. Current CFD providers focus on either the direct market access or market maker models. This new development is set to be launched in November 2007 on the ASX (Source: ASX website www.asx.com.au).

ASX CFDs will enjoy the traditional benefits of leverage enjoyed by over the counter contracts for difference but with reduced transaction costs from the central counter clearing model negating the financing charges traditionally imposed by third party cfd providers.[1]

Only accredited brokers will offer ASX CFDs and multiple market makers have been appointed to facilitate liquidity. Additional information about ASX CFDs, including market developments is available here.

ASX has also launched (24 September 2007) an ASX CFD Trading Simulator. The simulator allow a user to learn the basics of the ASX CFD market as well as explore trading strategies in a life-like environment… without risk to their capital.

Warrants

Warrants on the ASX are options over a company's shares issued by a third party. Issuers are usually investment banks or large stockbrokers. The issuer decides terms for an issue based on what it thinks market participants might be interested in buying. On exercise the warrant holder transacts directly with the issuer (there's no separate clearing house for that). Warrants come in the following types, suitable either as trading vehicles like options above, or as longer term investments.

  • Trading warrants: Calls or puts with various exercise style, expiry date, and contract size (ie. how many warrants correspond to one share). Issuers assess market demand to decide what sets of terms they will offer.
  • Knockout warrants: Like trading warrants, but starting in-the-money and terminating (ie. knocked-out) if the share price touches the strike (falls to the strike for a call, rises to it for a put).
  • Installment warrants: Call options with a final additional payment to be made on exercise. The final payment is in effect a loan by the issuer. The warrant holder receives dividends and has voting rights in the underlying shares.
  • Endowment warrants: Call options with long-dated expiry and varying exercise price. The exercise price represents an outstanding amount to pay. It's reduced by dividends and increased by ongoing interest fees. The idea is the warrant holder pays say half the share price up front (as the premium), and the dividends then pay off the rest over say 10 years. If the dividends pay off the balance sooner then the warrant holder receives fully paid shares at that time.
  • Perth mint gold: Call warrants of low exercise price over spot gold, issued by the Perth Mint. These work like an unleveraged long position in gold.

Warrants are traded on the SEATS system (see above) the same as shares. The issuer makes a market in their warrants by providing at least a bid for the life of the warrant. Due to the leverage, brokers must get a separate client agreement before the client can trade warrants.

Low exercise price options

A low exercise price option (LEPO) is a European style call option with a low exercise price of $0.01 and a contract size of 1000 shares to be delivered on exercise. LEPOs are traded on margin, and a trader may take a long or short position. Market makers ensure continuous price quotations.

LEPOs work like a futures contract. Being European style means they cannot be exercised until expiry, the premium is practically the whole share price, and a trader only posts margin, not the full price.

LEPOs were introduced in 1994, in response to the Sydney Futures Exchange offering futures over individual ASX shares. Regulations at the time prevented the ASX offering futures contracts, hence the LEPO form. Presently LEPOs are available on 47 leading stocks.

Interest rate market

The interest rate market on the ASX is the set of corporate bonds, floating rate notes, and bond-like preference shares listed on the exchange. Those securities are all traded and settled the same as ordinary shares, but the ASX provides information such as their maturity, effective interest rate, etc, to aid comparison.

Schools' Sharemarket Game

ASX provides school students the opportunity to hypothetically invest $50,000 into the stock exchange, and track its progress over several months. It allows students to buy and sell normally using rates from the current share prices. The last sharemarket game ended on 18th June 2007, and the 2007 game started on September 14.

Futures

The ASX trades futures over the ASX 50, ASX 200 and ASX property indexes, and over grain, electricity and wool. Options over grain futures are also traded.

Futures are traded on DTP, the Derivatives Trading Platform (also known as CLICK).

Market Indices

The ASX maintains stock indexes concerning stocks traded on the exchange in conjunction with Standard & Poors. There is a hierarchy of index groups called the S&P/ASX 20, S&P/ASX 50, S&P/ASX 100, S&P/ASX 200 and S&P/ASX 300, notionally containing the 20, 50, 100, 200 and 300 largest companies listed on the exchange, subject to some qualifications. Details of the index components are at the ASX website.

See also

References

[3] ASX Market Phases updated 5/11/2007

  1. ^ "ASX Market phases". Australian Stock Exchange. Retrieved 2006-07-17.
  2. ^ "History of ASX". Australian Stock Exchange. Retrieved 2006-07-24.
  3. ^ "SFE Ltd v ASX Ltd". Federal Court of Australia. Retrieved 2006-07-24.
  4. ^ "SFE Ltd v ASX Ltd and ASC (Intervener)". Federal Court of Australia. Retrieved 2006-07-24.


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