WHAT ARE THE IMPLICATIONS OF AUSTRALIA'S FIRST TRULY COMPETITIVE EXCHANGE?

Michael Somes

6 DECEMBER 2011

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OVERVIEW

Why have multiple markets? What is Chi-X? Our Launch – the story so far.Overview of the Chi-X Australia market.What does it mean for regulation and governance in Australia?

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WHY HAVE MULTIPLE MARKETS?

Capital markets are important.

The Johnson Report.

The consequences of not being involved in global developments.

“An exchange is like a bad supermarket. When you go on exchange, you effectively have to buy the price list, buy the milk, then buy the receipt – i.e. you buy the market data, then the stock, then the post-trade analysis. That model is simply not sustainable.” Peter Randall, CEO of Equiduct

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WHY HAVE MULTIPLE MARKETS?

The Spanish market as a laboratory.Gomber, Gsell, Lutat* compared pre and post MiFID trading and concluded that competition and market fragmentation among electronic financial markets in Europe has led to high market quality in terms of liquidity.

Higher market quality means lower (implicit) transaction costs, reduction in the cost of capital for issuers and improved market efficiency.For non-Spanish EURO STOXX instruments, a significant positive liquidity effect can be observed in the second period. Results for the less fragmented Spanish equity market indicate a significant decline in liquidity.

*Competition among electronic markets and market quality, Goethe University, Peter Gomber, Markus Gsell, Marco Lutat. Discussion Paper 01/2011.

Euro STOXX Group (Non-Spanish) Spanish IBEX 35 Group

Liquidity increased decreasedSpreads narrowed by 24.66% increased by 4.96% Impact €50k order decreased by 30.70% increased by 15.68%Impact €100k order decreased by 43.12% increased by 21.75%

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WHAT IS CHI-X?

We compete with ASX in one very small area. ASX Operating Revenue by category:– Derivatives 28%– Listings and Issuer Services 24%– Cash Market 22%– Information Services 11%– Technical Services 7%– Austraclear Services 5%– Other Revenue 3%

Cash market trading revenue represented 6.3% of total ASX revenue in FY11, compared to 10.4% in FY10

Source: ASX Limited Annual Report 2011

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WHAT IS CHI-X?

Launched in March 2007 by InstinetMiFID commenced Nov 2007Trading 15 markets across EuropeGrew to become second largest trading venue in Europe by turnover (Average daily turnover 6 Billion Euros: approx. 18% of the Pan-European Market)Recently taken over by BATS and expected to take a quarter of all European equities trading and 40 per cent of trading in FTSE stocks

Chi-X EuropeGlobal

Established to create Chi-X markets centres globallyIncludes:

Chi-X CanadaChi-X JapanChi-East (JV with SGX)Chi-X AustraliaChi-Tech

Now owned by a consortium of 6 major financial institutions

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OUR LAUNCH – THE STORY SO FAR

Soft launch on 31 October went smoothly and so moved to a full launch on 9 November with S&P/ASX 200 and ETFs traded on ASX.23 participants currently trading.Will expand stock universe beyond S&P/ASX 200 subject to participant demand.Have on occasion captured 2% of daily turnover in the S&P/ASX 200 and ETFs and have traded over 10% in the daily turnover of some individual securities.Comparison with BATs, Direct Edge and Chi-X Europe.

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OVERVIEW OF THE CHI-X AUSTRALIA MARKET

On-Market Trading Anonymous central limit

order book (CLOB) Matching based on

price/visibility/time priority Stock universe:

S&P/ASX 200 stocks + ETF’s Similar operating hours to

ASX No auctions – standing start

Order Attributes incl.: Iceberg Hidden Undisclosed IOC FOK

Order Types: Limit orders Pegged orders

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OVERVIEW OF THE CHI-X AUSTRALIA MARKET

Anomalous order risk controls to reduce risk of erroneous orders.Trades clear and settle in CHESS same as ASX trades.Tick sizes same as ASX.Trading halts & suspensions follow ASX.Trade Reporting for off-market trades due shortly.A standard FIX interface.A new way of thinking.

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OVERVIEW OF THE CHI-X AUSTRALIA MARKET

New order types with price improvement opportunities:

Best Bid Best Offer

$10.00 $10.06

Hidden Mid-PegOrder

Aggressive sell @ marketExecutes @ $10.03

$10.03

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OVERVIEW OF THE CHI-X AUSTRALIA MARKET

Simple pricing:No application fee for ‘membership’No annual participation feeMaker/taker pricing for tradingMarket data royalty freeSimple infrastructure model

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WHAT DOES IT MEAN FOR REGULATION AND GOVERNANCE IN AUSTRALIA?

We do not currently compete for listings

We are entering a well regulated space

The different global models for Exchange supervision

Learning from the European approach to the gaming of the auction

Decreasing the distance between compliance and the coal face

Timeliness

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WHAT DOES IT MEAN FOR REGULATION AND GOVERNANCE IN AUSTRALIA?

Best Execution - smart order routing a key tool: Configuration: routing tables and strategies Best execution a regulatory driver

Increased focus on transaction cost analysis to demonstrate best execution

Vendor solutions well advanced: many firms already using SOR technologyPrice improvement opportunities – e.g. mid point executions

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© 2011, Chi-X Australia Pty Ltd (“Chi-X”). All rights reserved. CHI-X is a registered trademark. Chi-X holds an Australian Markets Licence and operates a financial market in Australia.

While Chi-X has taken care preparing this document, to the extent permitted by law Chi-X makes no representations or warranties and excludes all liability (including for negligence) in relation to its content. This document is provided for informational purposes only. Under no circumstances is it to be used as a basis for, or considered as an offer to, engage in any activity or purchase or sell any security, or as a solicitation or recommendation of the purchase, sale, or offer to purchase or sell any security. Reproduction or redistribution is prohibited except with written permission from Chi-X.