Tired of the Usual Financial Centres? Try Trading “Down Under”

David Wilkinson

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Equinix ME1 in Melbourne, Australia

With an abundance of natural resources, Australia has become a key supplier to energy and commodity hungry developing nations. This has given the Australian economy a period of extensive growth over the past decade.

The Australian market is in a unique position. It is tied closely to the more developed Western capital markets and the growing Asian markets. However, Australia’s capital markets don’t receive the attention of some of the other Asian markets. Some investors might be missing out. A sound legal system, liquidity, increased competition and a variety of products and asset classes continue to make Australia an attractive market.

Coupled with an increasingly relevant asset management industry, highly developed trading tools and strong ecosystem development, these advantages offer a number of opportunities for capital markets participants in one of Asia’s southernmost outposts.

Hedging their bets

Australia’s hedge fund industry has developed rapidly in recent years, despite the fact that the volume of assets under management (AUM) is still relatively small compared to the whole Australian asset management industry. In fact, the Australian hedge fund industry has actually outperformed the global and overall Asian hedge funds according to research firm, Eurekahedge.

This strong performance, greater transparency and access, and relatively lower risk have made Australian hedge funds very attractive, compared to hedge funds in other countries. Accordingly, there could be a bright future for Australian hedge funds, with absolute return funds, CTA funds and FOF reckoned to be the most promising types.

Betting on bonds

The hybrid securities/convertible bonds market has not received a lot of attention from Australian investors. Data shows that although about a third of Australia’s adult population of 8 million invests directly into capital markets, only 75,000 invest in hybrid securities.

The benefits of hybrid securities are evident, especially after the global financial crisis. The floor of a convertible bond can protect the downside risk of equity, and when the equity price goes up, convertible bonds enjoy equity-like returns. Over the past 20 years, the convertibles actually outperformed equities, and at lower risk, which will likely make them an important asset class in the future.

However, hybrids are not without risk. Convertible issuers are typically less credit-worthy than regular issuers of debt and convertible bonds tend to behave more like equities instead of bonds. So the volatility of convertible securities has been growing in recent years. The Australian Securities and Investments Commission (ASIC) is working hard to find solutions to dispel investors’ concern, such as pushing clear, concise and effective prospectus disclosure and stricter requirements for risk control of brokers.

Technology reshaping the market

One of the biggest forces reshaping the Australian market is technology.

Currently, there are roughly 90 third-party commercial datacenters providing co-location services in Australia including the two main financial industry centers of Sydney and Melbourne. Competition between different datacenters is strong. That makes it all the more important for companies to understand the criteria that they should use to choose the right datacenter.

ASX opened its co-location facility called the Australian Liquidity Center (ALC) in In February 2012. Offering direct connections into the three main trade-matching engines: ASX Trade Match, Centre Point and ASX 24, the center allows latency sensitive customers to position themselves closer to the trading engine.

ASX has also worked to locate ASX ‘hubs’ in international data centres, while hosting those partners’ hubs in the ALC. Reciprocal connectivity was setup between ASX and the Singapore Stock Exchange (SGX) in 2012.

Equinix is playing a significant role. For example, the connection to the SGX sits in the ALC, which allows for faster access both for Singapore traders to the ASX and Australian traders to the SGX. The ASX has expanded this hub connectivity to London through Interxion and Chicago with Equinix.

ASX’s main competitor exchange, Chi-X Australia, has also set up in Equinix’s Sydney datacenter. With its matching engine sitting there, the Equinix datacenter has become a de-facto co-location facility for anyone trading on Chi-X Australia.

Open for opportunities

Australia’s capital market is one of the more attractive in the region, offering a diverse selection of asset classes and financial derivatives available for trading with relatively lower costs and regulation. Yet, the market faces significant issues.

For example, a strong Australian dollar and varying tax-regimes make investment in Australia sometimes challenging for international investors. In addition, although markets have de-regulated substantially in the recent past, lack of clearing competition and fee increases in non-competitive segments, still challenge the market.

However, as Australia continues to be an important player in the global economy – especially in terms of its relationship with China – the market should continue to grow over the next few years, both in terms of the economy and the financial markets.

Interested to learn more? Check out our new report ‘Trading in Sydney’ developed in conjunction with KapronAsia.

 

 

David Wilkinson
David Wilkinson Senior Director & Asia Pacific Lead, Global Vertical Marketing