Will they take an AXE to liquidity at the ASX? March 11, 2007
Posted by James Webster in : finance , trackbackAustralia’s first ECN (which I previously discussed) has been given a name; AXE ECN.
Professor Larry Harris talks about the externalities that face those seeking to set up competitive markets in Trading & Exchanges. The primary barrier is the order flow externality which is a network externality (aka the network effect). The more people that use a market (or any system for that matter) the greater benefit it has for its existing participants and the more attractive it becomes to potential participants. Conversely a new competitor has a significant battle to fight if it wants to win customers; significant incentives need to be offered to use the new market to overcome the effects of the network externality.
In the case of the new Aussie ECN, it may be much less of an issue. The NZX has entered a joint venture with sell-side firms such as ‘Citigroup, CommSec, Goldman Sachs JBWere, Macquarie Securities and Merrill Lynch’ (from the AXE ECN press release) to set up the new ECN. One might suppose that they may divert a significant portion of their order flow from the ASX to AXE ECN instead, moving liquidity from one market to another. If they do this, I expect that ASIC will be very interested in whether best execution is being obtained for client orders; the question of whether the best price has been obtained by the broker on behalf of the client.
Interesting times for equity trading in Australia!
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[…] it appears that the ASX is feeling the heat. And AXE will probably avoid the network externality… ‘Yanco believes AXE’s initial business, provided by its shareholders, will […]