Chi-X CEO’s warning for amateur investors

As Chi-X Australia facilitates access to hot US stocks such as Zoom and Gilead, its CEO is warning of a dangerous trend among amateur investors.

Chi-X Australia CEO Vic Jokovic, right, and Nine Mile Financial's Morgan Potter. Picture: Karl Schwerdtfeger

Chi-X Australia CEO Vic Jokovic has issued a stark warning to new investors riding the recent sharemarket rally, urging the growing cohort to invest with a longer-term horizon as he expressed concerns over the rise in day-trader-like activity.

The local sharemarket has gained 30 per cent since its March lows, but higher volatility was likely in the coming months, Mr Jokovic said, as he cautioned that investors were preoccupied with the threat of a potential second wave of the coronavirus when they should be concerned that the first wave was still “healthy and strong”.

“It’s good that there’s heightened activity and there are new people finding the sharemarket for the first time. But it’s also dangerous in that there’s a lot of day trading happening,” he said.

“A lot of new retail investors have had a positive experience in the equity market. But that’s not to say it’s always going to be positive, and I hazard that they should be careful and look for a longer horizon in the way they invest.”

He said a short-term horizon in the sharemarket should be three to six months, not three to six days.

Chi-X, a competitor to the Australian Securities Exchange, has experienced record trading volumes in recent months, driven in part by “incredibly high” retail participation and new investors in the market. The exchange accounts for about 18 per cent of average daily cash equities trading in the local market and 35 per cent of exchange traded fund volume.

Following requests from brokers to provide access to US stocks that have been “COVID winners”, it recently launched its latest tranche of transferable custody receipts, also known as TraCRs, which include videoconferencing service Zoom, protective healthcare equipment provider 3M and biotech Gilead Sciences.

In total, Chi-X now offers Australian investors access to 35 listed US companies through its TraCRs, which function similar to American Depository Receipts in the US. They give the purchaser a beneficial interest in an underlying share. So buying one Zoom TraCR means an investor holds the beneficial interest in one Zoom share.

The benefit to Australian investors, Mr Jokovic said, was that they are traded in Australian dollars during local market hours.

Dividends are in Australian dollars (with US taxes and fees deducted) and they are cleared through the ASX’s clearing system in the same way as local shares.

“In a time of heightened volatility and heightened risk, diversification is one of your only tools if you’re going to be in the equity market. And diversification into big global proven brands is not a bad place to be,” Mr Jokovic said.

First launched in late 2018 with its Apple TraCR, the uptake of the product had been “slower than we would have liked”, Mr Jokovic conceded.

The exchange has seen just 1300 TraCR trades in total since launch, with its TraCR assets under management sitting at about $30m.

“It isn’t significant, but it’s growing,” he said, adding that he is targeting $200m in assets under management in the next 12 months.

Chi-X has partnered with local market maker Nine Mile Financial, run by ex-Macquarie banker Morgan Potter, to facilitate the increased demand and uptick in trading activity during the COVID pandemic, including in the Chi-X-quoted TraCRs.

Bringing Nine Mile on would be beneficial due to the tighter spreads the market maker would facilitate, Mr Jokovic said. Mr Potter, who was global head of ETFs for Macquarie before he left to set up Nine Mile in 2016, said TraCRs provided diversification benefits at a time when investors should be investing cautiously.

“As a relatively new player in the market maker space, which has traditionally been dominated by major global financial institutions and investment banks, agility was a critical factor for us when considering an exchange,” Mr Potter said.

“Our decision to partner with Chi-X was driven by a belief in their products, agility and a joint desire to deliver better outcomes for Australian investors.”

Nine Mile Financial joins Deutsche Bank, Virtu Financial and Susquehanna as the fourth registered market maker on Chi-X.