Cboe, CSE challenge ASX dominance in Australian stock market shake-up
The ASX’s 40-year stock exchange monopoly faces its biggest challenge as regulators near approval for rival operators from overseas. But what does it mean for everyday investors?
Australian investors could see lower trading prices and more easily access international stocks, with new competitors for the Australian Securities Exchange looking to shake up its decades-long monopoly.
The corporate watchdog is in the final stages of considering an application from rival market operator Cboe to expand its operations in Australia, including plans for a new full service exchange for publicly listed companies.
ASIC says Cboe’s entry would “enhance competition and attract foreign investment, providing more choice for investors and greater international alignment”.
But who is Cboe and what would a challenger to the ASX’s market dominance really mean for investors?
What prompted the shake up?
The ASX was formed in 1987 after federal parliament passed legislation amalgamating six independent state-based stock exchanges.
But in recent years the company, which itself is listed on the ASX, has come under the scrutiny of regulators following a series of serious failures.
ASIC last year launched legal action against ASX relating to the exchange’s bungled upgrade of its ageing CHESS clearing and settlement platform, which led to the departure of its then chief executive Dominic Stevens in 2022.
The upgrade was riddled with delays, and was later shelved in favour of an alternative technology provider. There have been accusations of misleading statements over the CHESS upgrade delays, and a class-action lawsuit is brewing.
The embarrassing failures continued last December when a critical outage in the CHESS system caused delays to the clearing and settlement of trades, prompting regulatory intervention from the Reserve Bank and ASIC.
And on Wednesday things went from bad to worse when the ASX incorrectly announced that TPG Telecom was acquiring Infomedia, when the actual buyer was TPG Capital Asia.
The error caused TPG Telecom shares to plunge 4 per cent, wiping out $410m in market value, before trading was suspended and later corrected.
The long line of failures has undermined confidence in the ASX’s monopoly over trading infrastructure, and ASIC announced in June an inquiry into the ASX, focused on “governance, capability and risk management frameworks and practices across the group”.
“ASIC’s decision to initiate an inquiry follows repeated and serious failures at ASX,” ASIC chair Joe Longo said at the time.
On Wednesday, ASIC said it was close to approving rival exchange platforms, most notably Cboe and CSE (Canadian Securities Exchange), aiming to inject competition for listings and clearing services.
Who are the challengers?
Cboe:
Cboe Global Markets is a $US26bn ($40 billion) US-listed stock exchange operator.
Established in 1973, Cboe – which emerged out of the Chicago Board of Options Exchange – operates markets across North America, Europe, and Asia-Pacific, offering trading in equities, options, futures, foreign exchange and digital assets.
Cboe in 2021 acquired ASX rival Chi-X, which trades ASX-listed shares over its own venue, but is not currently authorised to conduct new listings of companies (also known as initial public offerings) in Australia.
Last year it quietly applied for a broader trading role, which ASIC is currently considering.
Canadian Securities Exchange:
The Canadian Securities Exchange listed its first publicly traded companies in 2003, and has since gone on to expand its marketplace to more than 800 listed securities and more than 60 dealers.
It is primarily focused on early stage, entrepreneurial companies, with particular strength in the resources sector.
In May the company announced plans to acquire Australia’s National Stock Exchange, which has failed to dent the dominance of the ASX, with just 52 listed entities among its ranks.
The CSE plans to create a meaningful alternative to the ASX for early stage small cap companies, including explorers, miners and biotechs, but without the heavy compliance requirements.
The proposed acquisition is going through regulatory approvals.
What does all this mean for companies and investors?
Having more than one full service stock exchange is not unusual, in fact it’s the norm in many of the world’s developed financial markets.
In the US, for example, there’s the New York Stock Exchange, which is the world’s largest exchange, and then there’s the NASDAQ, with its focus on tech companies such as Apple, Amazon and Meta.
In the UK, the London Stock Exchange runs its ‘Main Market’, as well as the AIM market for smaller and growing companies, with less regulation and compliance.
And in Canada, there’s the Toronto Stock Exchange for large companies, and the TSX Venture Exchange and Canadian Securities Exchange for small cap and early stage companies.
More competition tends to drive lower prices, and that’s what’s anticipated if a meaningful alternative to the ASX emerges.
For investors, another market operator would drive down prices for traders and stockbrokers, with the savings likely to trickle down to retail investors.
For companies, a secondary market will inject more competition into the market for initial public offerings.
There’s been a dearth of IPOs in recent years due to the onerous cost and compliance requirements associated with an ASX listing, and any move to drive down the costs of running a publicly listed company could encourage more private companies to tap the public markets.
A secondary market similar to the AIM market operated by the London Stock Exchange, where the regulatory and compliance requirements are less stringent, could offer a viable alternative for early stage small cap companies, including explorers, miners and biotechs.
However for the ASX itself, the arrival of a major competitor would be a financial blow, with Macquarie estimating the combined Cboe and CSE moves could slice up to $50m from the company’s annual revenue.
Are there other benefits for regular investors?
The main change expected is the savings from lower trading costs, forced by competition between exchanges - particularly if stockbrokers charge a percentage of the transaction as their brokerage fee.
Investors are also expected to benefit from dual listings, with companies in offshore markets listing on a second exchange in Australia.
In a statement announcing the NSX acquisition, CSE CEO Richard Carleton said his company would look at “inter-listing” between the Canadian and Australian exchanges.
Professor of finance Angel Zhong from RMIT University said investors would have more access to both smaller local companies which might not have wanted to list on the ASX as well as international dual listings.
“It will also likely encourage foreign companies’ participation in our market, so we can attract more foreign investment,” Professor Zhong said.
“If we have foreign companies listing on some of the Australian exchanges, that means you can have easier access to foreign investment to diversify your investment portfolio more easily.”
Hamish Dee, director of market operations at Morgans Financial and chair of the Stockbrokers and Investment Advisers Association said dual listings allowed companies to reach a broader pool of investors for more funding, while investors would likely have prices evening out between markets.
“As an example, if it was a Canadian and Australian listed [stock] then you probably get some price clarity around an international pricing of what that market would be for that particular stock.
“If you look at resources stocks, you can have a disparity in pricing between countries.
“Traditionally, North American gold companies have probably traded at a premium to Australian gold companies, but if you have the dual listing, it’s probably less nationalistic.
“If you’ve a dual listing you know the level of fair pricing when you’re comparing the two exchanges.”
Could the ASX be forced to change?
Profesor Zhong said competition would also push the ASX to invest in its technology and improve its systems, after the TPG blunder and delayed CHESS clearing and settlement platform upgrades.
“It’s a broader push to modernise Australia’s financial market and also reduce reliance on the ASX, which hasn’t been robust and efficient,” she said.
“They’ve been talking about a replacement of the trading system for a very long time and that has been overdue for several years, millions of dollars have been invested over there.
“Limited competition can breed complacency.”
She added the trading market needed “competition, accountability and innovation”.
“Trust is really the currency of the financial market, because if investors don’t trust you they don’t want to trade,” she said.
“Having trade is very important for the financial market because it facilitates capital flow - without capital flow, our Australian companies won’t get the money to invest in projects, which will slow down the growth of the economy.”
“Giving investors more options and having competition can potentially improve market resilience.”
The ASX wasn’t the only exchange expected to improve.
Dr Zhong said the NSX had likely been limited in the Australian market, due to it not being integrated with major trading platforms - “making it harder for brokers to trade”.
Companies would have also likely hesitated to join an exchange with only 54 listings and more limited liquidity, she said.
The CSE acquisition could bring much-needed investment to its infrastructure, she said.
“That’s why there is lower liquidity there and it becomes like a cycle.
“You have a gap in your infrastructure and technology, so you are not integrated to a major platform, which results in lower liquidity.
“If you are running a company... of course you want to list it on an exchange where there’s a larger volume liquidity.”
To join the conversation, please log in. Don't have an account? Register
Join the conversation, you are commenting as Logout