The role of alternative exchanges: A Q&A with the CEO of Chi-X March 2020

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Speaking with Vic Jokovic, the Chi-X CEO now entering his third year with the organisation, is remarkably refreshing. Bringing decades of experience at the highest levels of finance, including serving as the managing director for Deutsche Bank, Jokovic is as confident and engaging as he is open and honest. For a journalist who is accustomed to overly-polished and guarded answers, it was like a breath of fresh air.

Jokovic shares his view on the value of diversity across exchanges, how product issuers can find value by looking outside of established channels, and how disruptors often end up in the uncomfortable position of adapting to be the new norm.

What is the point of differentiation between Chi-X and other exchanges, like the ASX?

Chi-X received its Exchange license in 2011, to compete with the ASX and to bring competition to exchange services more generally. In a relatively short amount of time, Chi-X has grown from zero volumes to executing well over a billion dollars a day of turnover. I’m certain that the general public would not be aware that up to approximately 20% of all Australian share orders are actually executed on Chi-X, partly or entirely, as opposed to the ASX.

When thinking of Chi-X as a competitor to the ASX - think Uber versus the taxi industry or Aldi vs Woolworths and Coles. Part of this competitive role is to bring some tension around pricing. Chi-X offers many of the same services as the ASX at a lower cost to the broking community. Brokers are therefore better able to absorb the additional costs of things, like increased compliance requirements, because their exchange costs are cheaper. These lower costs have also been passed on to the end client in the form of much lower commission rates than Australians were paying in the past.

Australia seems to have two camps: the established brands and the upstarts. Why do you think that is?

Australia has a relatively small population and, perhaps because of this, throughout history many Industries have been dominated by a monopoly provider or a small number of dominant players (Oligopolies). That said, Canada is a market of similar size and yet there are now more than 10 stock exchanges operating in Canada. It is probably fair to say that Australia has been slow to adopt additional competition.

Australians have also proved to be conservative, particularly when it comes to financial products, and are circumspect about dealing with financial institutions outside of the bulge bracket. But that is starting to change. A good illustration of this is in the banking sector. In recent years we have seen a number of new players (disruptors) offering competing products, which has the dual benefits of driving prices down and forcing the incumbents to “clean up their act.”

The world has changed. The breadth of technological advancement in every segment of finance has meant that you can do your banking and other financial transactions in very different ways i.e. with greater flexibility, efficiency, and at cheaper prices. As we all know, either you “innovate or you die”, particularly with the increased speed of change.

For product issuers, what are the advantages of launching on Chi-X compared to, say, ASX?

The first piece of the Chi-X story, or evolution, was to create a stable and technologically advanced trading system that would allow Chi-X to compete with the ASX as a credible alternative for brokers, and therefore their underlying clients (i.e. mums, dads, superannuation accounts, and Institutional clients).

Our offering then evolved according to broker and institutional demand to include Indices, International products (TraCRs), Warrants, and most recently the ability for fund managers to list their funds on Chi-X (i.e. on the Chi-X stock exchange). Many funds have chosen to uniquely list on Chi-X, including Fidante Partners’ ActiveX Kapstream Absolute Return Income Fund (XKAP); e-Invest Cash Booster Fund (ECAS), e-Invest Core Income Fund (ECOR), and e-Invest Income Maximiser Fund (EMAX); and Schroders’ Absolute Return Fund (PAYS).

So, what is the advantage of listing products on Chi-X? Firstly, we are significantly cheaper than the ASX. However, that’s only one piece of the puzzle. While our technology is strong, we are also a business that has thrived on innovation and our size has allowed us to move a little quicker than the ASX on certain products. As a larger and more complex business, the ASX has many competing projects and businesses, and therefore their innovation across some products has been slower than Chi-X, which is a more nimble and agile business. Chi-X has been very focussed on delivering outcomes according to client demand.

That’s what people say about disruptors: end users love it but the establishment isn’t a fan.

What I say to that is the ASX, across a number of their businesses, is a monopoly. They themselves should – or would – admit that. Look, if you are a monopoly, it's great because you can do what you want and you can set your pricing however you want, without fear that a competitor is going to undercut you. But I don't think anyone – including the people at the ASX – can argue that competition isn't a good thing.

Our ability to shop with more than one retailer, or get an Uber rather than a taxi, or to find a communication provider other than Telstra has not only saved us all money it has also spurned much improved products and services. So, it's just a natural evolution. The exchange in Australia has evolved into a multi-exchange environment and we’re the key competitor to the ASX and that has to be a good thing for brokers, fund managers, and mum and dad investors.

You also rightly mentioned there are other exchanges in the Australian market. Two small listing exchanges / venues also compete with the ASX, however they are not large trading venues like the ASX and Chi-X.

Does the pricing aspect draw product issuers to Chi-X? And how do the fees work?

You have to absorb fees in every product that comes to market - be that the listing fee, an annual fee of some sort, or compliance / regulatory fees, etc. – and this extends beyond the funds management industry. Exchange costs may not be the key determinant of issuing a new product, but it's a major driver that needs to be taken into consideration when launching a new and innovative product. And remember we need more innovation, more solutions not less.

The key businesses that absorb exchange fees are broking firms. Their ability to survive in an environment where you have lower commission rates driven by online brokers and online services is at risk. And ultimately, the health of our broking and financial advisory firms is important for not only Australian investors but also for the exchanges, ASX and Chi-X.

Have you noticed any particular trends over the last year of product launches that are particularly notable, and is there anything that you expect to see launched on Chi-X?

The two key product developments at Chi-X are a result of exactly that – trends and customer demand. We have seen significant demand from customers for international product and also for products offering enhanced fixed income returns.

As we all know, Australia has a pension or superannuation scheme that is now one of the largest in the world at over $2.3 trillion and with inflows well above $100 billion a year. Yet the market cap (total value) of the Australian Equity market is only approximately $2 trillion. So, simplistically we have a pension scheme that is bigger than the local equity market and is continuing to rapidly grow. This alone tells you that this money needs to find an external funnel, both because of the sheer size and the need for Australian investors to better diversify - i.e. reduce the risk of being solely exposed to the Australian share market. Hence the increased appetite for international shares and ETFs.

The problem, however, with investing in international shares directly is that it's not straightforward and it is expensive. If you're trading shares internationally, you will need to set up an International account, you may need to get up in the middle of the night to trade, you will likely need to deal with a foreign broker and pay large FX fees (large FX spreads / conversions). I think an important piece of advice for retail clients is to be as aware of FX charges - commission rates or any other charge - as often this is the most prohibitive aspect of investing internationally.

Given these challenges, Chi-X worked proactively with a number of clients to bring TraCRs to the Australian market. TraCRs allows Australian investors to call their existing stock broker and buy Apple shares, or Microsoft, or Johnson and Johnson, or Berkshire Hathaway, and many other large US companies in the Australian time zone (i.e. during Australian trading hours), in Australian dollars with dividends paid in AUD, and your holding can sit on your existing HIN. In other words, it’s no different to buying an ANZ or Telstra share. Importantly, since the TraCRs launch in late 2018, over 20 Australian broking firms have offered their client’s access to TraCRs via Chi-X. Currently, there are 30 US stocks available with approximately 40 expected by the end of the first quarter including large US companies that most Australian’s know well like Starbucks, McDonald’s, Visa, Netflix, etc.

The second key trend I mentioned is investor demand for fixed income products with higher returns (risk-adjusted). With interest rates at historic lows, not just in Australia but globally, the demand for higher fixed rate returns is significant. The current fixed income funds offered through Chi-X Funds aim to meet this growing demand.

With 18% of the market going through Chi-X, do you look to position Chi-X where you’re cutting off the ASX?

Whilst we are determined to continue to take market share from the ASX, largely through innovation, we also need to acknowledge that ASX is a great business, managed by a high-quality management team that, as discussed, continues to enjoy a monopoly position in a number of its businesses. Therefore, the challenge for Chi-X to grow further is not insignificant. Chi-X will need to continue to expand its innovative products suite. With the support of the broking and funds management industry, we believe we can grow to 25% of the Equity market over the next 1-2 years.

Casual investors are an increasingly large portion of the market, a far cry from how we viewed Wall Street in years past. How do you view the modern finance world going forward?

I have a long history in the industry. I started in ‘85. The world of exchanges has changed. There are still some exchange floors across North America, but the rest of the globe is driven by very sophisticated trading platforms / computer systems. Within broking firms, very sophisticated Smart Order router technology sends the order that the investor places to the best place to execute that order (ASX or Chi-X) based on best price, liquidity, etc. Almost every broker will use a smart order router that will send that order to Chi-X and/or the ASX.

In some cases, some of the big retail brokers like CommSec and Westpac online preference Chi-X. The biggest retail broker in the country, CommSec, will send all their orders to Chi-X first, and then if Chi-X doesn't fulfil the order, based on best execution, it will route to the ASX. The technology has been built and the world has moved on from traditional trading floors.

So, no more Exchange floors with operators and chalkies for Australia…all of that has moved to broking floors and the Exchange floors of the ASX and Chi-X.

A lot of the recognition for the casual investor comes from news reports on market movements. Do you want to be in a position where you’re part of newscasts where people say, you know, Chi-X is up or Chi-X is down?

We are working on some branding that involves Chi-X tickers and the use of the Chi-X indices (the CXA 200 index is a product developed out of our partnership with the Singapore Stock Exchange).

As I have mentioned, whilst brand recognition is a good thing, ultimately we are a B2B business. As a stock exchange, we interact primarily with brokers and fund managers - i.e. we are far less dependent on mums and dads knowing what we do. Mums and dads execute their orders via their broker or online broker and the Australian broking community recognise that there are two exchange venues to go to in Australia. Brokers also recognise that Chi-X has helped drive significant cost savings and innovation and that the introduction of competition in Australian Exchange markets is a very good thing for investors.

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