|Type||Public (ASX: ASX)|
|Founded||1987, but dating back to 1861|
|Key people||David Gonski, (Chair)
Robert Elstone, (CEO and Managing Director)
Alan Bardwell, CFO
Eric Mayne, CSO
|Revenue||▲ A$624.38 million (2008)|
|Employees||560 (30 June 2008) |
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, becoming the 9th largest stock exchange in the world.
The biggest stocks traded on the ASX, in terms of their market capitalisation, include BHP Billiton, Commonwealth Bank of Australia, Telstra Corporation, Rio Tinto, National Australia Bank and Australia and New Zealand Banking Group. As at 31 December 2006 the three largest sectors by market capitalisation 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.
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 4:12pm 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.
Brokers that dominate market share in Australia (in decreasing order) include Macquarie Bank, Goldman Sachs JBWere, UBS, Citigroup, 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.
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). A further exchange in Launceston merged into the Hobart exchange.
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.
1969–1970: The Poseidon bubble (a mining boom triggered by a nickel discovery in Western Australia) caused Australian mining shares to soar and then crash, prompting regulatory recommendations that ultimately led to Australia's national companies and securities legislation.
1976: The Australian Options Market was established, trading call options.
1980: The separate Melbourne and Sydney stock exchange indices were replaced by Australian Stock Exchange indices.
1984: Brokers' commission rates were deregulated. Commissions have gradually fallen ever since, with rates today as low as 0.12% or 0.1% from discount internet-based brokers.
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.
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.
1994: The Sydney Futures Exchange announced trading in futures over individual ASX stocks. The ASX responded with the Low Exercise Price Option or LEPO (see below). The SFE went to court, claiming that LEPOs were futures (certainly their effect is like futures) and therefore the ASX could not offer them. However, the court held they were options and so LEPOs were introduced in 1995.
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.
1996: The exchange members (brokers etc.) voted to demutualise. 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.
1997: A phased transition to the electronic CLICK system for derivatives began.
2006: The ASX announced a merger with the Sydney Futures Exchange, the primary derivatives exchange in Australia.
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). However it must be realised that as the ITS system is in effect four separate systems 'side by side', contingencies are limited as orders cannot span separate ITS market 'partitions'.
SEATS was an all-electronic order matching system, based on time and price priority. Two types of orders were accepted,
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 the order is completed, or cancelled. The exchange automatically cancels orders when a stock goes ex-dividend or ex other entitlements.
Unlike the ITS system the SEATS system accepted orders with an undisclosed quantity. In SEATS, orders with an undisclosed quantity would trade from the undisclosed portion of the order until the whole order was fully filled – without loss of time priority – this was not common international practice and in ITS it was intended to replace this function with the 'Iceberg Order' – an order that automatically refilled the disclosed quantity when exhausted until the intended quantity was traded. As of December 2007, technical and performance problems at the ASX have prevented this implementation, and as such there are no undisclosed orders of any type offered on ITS in the main Australian equity market.
There is a minimum price unit for quotations and trades in the system. This 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:
|Share price||Minimum step|
|< 10 cents||0.1 cent|
|10 cents–$1.995||0.5 cent|
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.
The first time a trader purchases stock in a particular security, they must trade a minimum amount of shares called a "marketable parcel". Currently a marketable parcel is defined as at least $500 worth of the stock in question. The marketable parcel restriction applies only to the first trade in any particular stock.
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 maximises 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 stop loss orders in SEATS, but anyone may 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.
Investors hold shares in one of two forms. Both operate as uncertificated holdings (rather than through the issue of physical share certificates):
Holdings may be moved from issuer-sponsored to CHESS or between different brokers by electronic message initiated by the controlling participant.
Short selling of shares is permitted on the ASX, but only among designated stocks and with certain conditions:
Many brokers do not offer short selling to small private investors. LEPOs (below) can serve as an equivalent. Contracts for difference (CFDs) 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.
In September 2008, ASIC suspended nearly all forms of short selling due to concerns about market stability in the ongoing global financial crisis. The ban on covered short selling was lifted in May 2009.
Options on leading shares are traded on the ASX, with standardised 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:
In both cases there is 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 (i.e. buy) and write (i.e. sell) options. For written positions, the client must put up margin.
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 and will be offered by Australia's leading online brokers and over-the-counter (OTC) CFD providers including First Prudential Markets (FPM) and Commsec.
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.
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 allows 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 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 is no separate clearing house). Warrants come in the following types, suitable either as trading vehicles like options above, or as longer term investments.
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.
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, 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.
The ASX interest rate market is the set of corporate bonds, floating rate notes, and bond-like preference shares listed on the exchange. These securities are traded and settled in the same way as ordinary shares, but the ASX provides information such as their maturity, effective interest rate, etc., to aid comparison.
The Sydney Futures Exchange (SFE) – now a part of the AFX – was the 10th largest derivatives exchange in the world, providing derivatives in interest rates, equities, currencies and commodities. It provided futures and options on the four most actively traded markets - interest rates, equities, currencies and commodities including wool and cattle. Its most active products are:
Futures are traded on DTP, the Derivatives Trading Platform (also known as CLICK).
The ASX maintains stock indexes concerning stocks traded on the exchange in conjunction with Standard & Poor's. 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.
ASX's Schools' Sharemarket Game provides school students with the opportunity to hypothetically invest $50,000 in the stock exchange. Students buy and sell shares at current market prices and track the progress of their investments over a ten-week period.
ASX and the Australian Securities and Investments Commission (ASIC) "co-regulate" ASX. There are at least 20 examples of co-regulation:
 ASX Market Phases updated 5/11/2007