Terms Beginning With 'a'

Australian Securities Exchange (ASX)

  • January 17, 2020
  • Team Kalkine

 

What is the Australian Securities Exchange?

Australian Securities Exchange is the prime stock exchange in Australia. It is also one of the leading stock exchanges globally and regionally competes with exchanges in Shanghai, Hong Kong, Japan, Taiwan, South Korea. ASX was incorporated in the year 1987 after the amalgamation of six state-based stock exchanges. The exchange is incorporated under the legislation of the Australian Parliament & is owned by the Australian Securities Exchange Ltd, or ASX Limited,

ASX offers a range of products to market participants, including equity, bonds, hybrids, ETFs, ETPs, managed funds, warrants, index derivatives, interest-rate derivatives, energy derivatives, grains derivatives, options.

ASX is just not an exchange for trading but it incorporates other functions like being a market operator, oversees compliance with its operating rules, corporate governance, clearing house & payments system facilitator and educates retail investors.

Business as usual in equities at the exchange kicks-off at 7 AM and brokers start entering orders and trades are captured, this duration is called pre-open market. At 10 AM, the trading session opens and takes 10 mins to publish the opening prices for the listed assets, which hit exchange boards in five separate groups. Normal trading on ASX ends at 4 PM.

A brief history of ASX

The first company was incorporated in New South Wales in the early 19th century. It continues to serve Australia since its founding in 1817 as The Bank of New South Wales – now known as Westpac Banking Corporation (ASX:WBC).

In the wake of gold rush in the 19th century, several stock exchanges were formed in Australia, including Sydney Stock Exchange, Brisbane Stock Exchange, Perth Stock Exchange – predecessors to ASX.  

In 1885, BHP Group Limited (ASX:BHP) went public, which was incorporated two years before the listing as The Broken Hill Proprietary Company Limited.

In 1937, there was a consensus among stock exchanges in Australia, leading to uniform listing requirements, rule and brokerage. The consortium was known as the Australian Associated Stock Exchanges (AASE).

Sydney Greasy Wool Futures Exchange (SGWFE) had great success after establishing in 1960, providing hedging facilities to Australian wool traders. In 1972, the futures exchange changed its name to Sydney Futures Exchange (SFE).

In 1962, stocks started trading under three-letter company codes in Sydney, which was also replicated in Melbourne after success. As a result of technological advancements in the 1960s, the Sydney Stock Exchange also installed its first computer having got the delivery in seven parts. Now brokers were able to see last, bid and offer prices at their desks through a joint venture between Reuters and Sydney Stock Exchange.

In 1970, New South Wales adopted the Security Industry Act to promote ethical standards in the industry. Four years later, the Australian Government recommended the need of corporate regulator through a Select Committee report, and the Australian Securities Investment Commission (ASIC) came to existence.

Six years later, the Sydney Stock Exchange started options trading, which was the first market for exchange-traded options outside of North America. A popular stock market games, which still runs today, was initiated in 1977.

Over the next decade, capital markets in the country embraced further technological advancements and introduced new products like gold futures, bank bill futures, bond futures.

In 1987, the merger of six stock exchanges led to the formation of the Australian Stock Exchange. Over the years, Australian derivative markets gained more footing in global futures markets, including after-hours trading, an exemption to entry in the US futures market.

In the 1990s, there was further development in capital markets and investments, especially in technology, regulatory, product, clearing and settlement. Australia’s brands and present large companies like Commonwealth Bank of Australia (ASX:CBA), Qantas Airways Limited (ASX:QAN), Woolworths Group (ASX:WOW), AMP Limited (ASX:AMP) entered public markets.

Additional amendments and reforms were enacted in Corporate Laws, interest rate markets were opened retail investors, the settlement cycle was further shortened to T+3 from T+5.

At the dawn of this century, the merger of Austraclear and SFE became a leading business with clearing, settlement and depository service provider. Goods and Services Tax arrived in the country and dotcom bubble burst. In the next few years, SFE completed entering public markets with a listing on ASX, and in 2006, SFE was merged with ASX.

Who are the regulators of ASX?

ASX in Australia operates in a highly complex environment that is regulated mainly by two independent Australian government agencies, that comprises of The Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA). ASIC supervises the real-time trading on Australia's domestic licensed financial markets and supervises ASX's own compliance as a public company with ASX Listing Rules. ASX Compliance forms part of ASX subsidiary company that monitors and enforces ASX-listed companies' compliance according to the ASX operating rules. The Reserve Bank of Australia (RBA) checks the ASX's clearing and settlement facilities for financial system stability. Other regulators are The Australian Prudential Regulatory Authority, Council of Financial Regulators (CFR) (Australia’s main financial regulatory agencies comprising of the RBA (Chair), ASIC, APRA and Treasury) and Treasury. CFR oversees the efficiency and effectiveness of financial regulation, and stabilizes the Australian financial system. CFR also gives advice to the Federal Government for making Australia’s financial regulatory arrangements.

How many sectors are covered on ASX?

The companies listed on ASX are segregated into thirteen sectors, however these are bucketed into two larger categories: resources and industrial.

Minerals explorers and producers, and energy companies fall under the Resources category. While, Industrials covers rest of other streams including information technology, banking and insurance, telecommunications, media and transport companies.  

Do you know ASX is listed on ASX!

ASX Limited (ASX:ASX) adopted the brand ASX Group to better reflect its purpose in the Australian capital markets. The company was listed in 1999 and has over two thousand listed entities on its exchange.

It is a constituent of all major indices in Australia and is traded under the symbol ASX on the Australian Stock Exchange. ASX posted a profit of $492 million on revenue of $1.1 billion in 2019.

In 2019, the exchange had 86% market share in equities trading. It has been a sweet spot for small, growing foreign companies, including technology listings.

What are the trading systems on ASX? How ASX is operated?

ASX operates through two trading platforms, which includes ASX Trade, that supports the trading of ASX equity securities, and ASX Trade24 for facilitating derivative securities trading.

All the equity stocks are traded on screen on ASX Trade, which is a NASDAQ OMX ultra-low latency trading platform that is based on NASDAQ OMX's Genium INET system, and are used by many exchanges around the world. The platform is considered to be one of the fastest and most functional multi-asset trading platforms in the world.

Derivatives are traded on ASX Trade24, which is globally distributed with network access points (gateways) and located in Chicago, New York, London, Hong Kong, Singapore, Sydney and Melbourne. The platform supports 24-hour trading, and also simultaneously maintains two active trading days. This allows the products to be open for trading in the new trading day in one time zone while products are still trading under the previous day.

On the other hand, the normal trading on the ASX are on business days (Monday to Friday). ASX does not operate on national public holidays. There is a pre-market session which is from 7:00 AM to 10:00 AM. The market opens alphabetically in single-price auctions, which is phased over the first ten minutes, and then a small random time is built in order to prevent exact prediction of the first trades. The exchange also does a single-price auction which happens between 4:10 PM and 4:11 PM to set the daily closing prices. The investor holds shares in one of two forms, but not in physical forms.

Meanwhile, the traders can short sell the shares on the ASX, but only on designated stocks and with the conditions. For short selling, the brokers must necessarily report all their daily gross short sales to ASX and then the aggregate report of the gross short sales is generated. ASX then publishes this aggregate gross short sales to ASX participants and the general public.

ASX benchmarks

ASX, in collaboration with S&P, provides a range of indices. These indices also include the mainstream benchmark indices of Australia. Some of these are:

  • S&P/ASX 20
  • S&P/ASX 50
  • S&P/ASX 100
  • S&P/ASX 200
  • S&P/ASX 300
  • ALL ORDINARIES
  • S&P/ASX MIDCAP 50
  • S&P/ASX SMALL ORDINARIES
  • S&P/ASX All Australian 50
  • S&P/ASX All Australian 200
  • S&P/ASX Dividend Opportunities Index
  • S&P/ASX Emerging Companies Index
  • S&P/ASX All Ordinaries Gold (Sub Industry)
  • S&P/ASX Franked Dividend Index
  • S&P/ASX All Technology Index
  • S&P/ASX 200 Inverse Daily Index
  • S&P/ASX 200 VIX Index

An investor or an institution who is allowed to deal in the securities not registered with the financial institutions. An accredited investor in the United States has to either have a net worth of a million USD or have an income of US$2,00,000 each year for the past two years (3,00,000 combined income if married).

An alternative to traditional stock exchanges, dark pools are referred to private forums or exchanges formed for trading of securities. They offer an opportunity to investors to make trades without revealing their intentions publicly.

What is Day Trading? Day trading is popular among a section of market participants. It is a type of speculation wherein trades are squared-off before the market close in the same day. An individual or a group is engaged in buying and selling of securities for a short period for profits, the trades could be active for seconds, minutes or hours.  One can engage in day trading of many securities in the market. Anyone who has sufficient capital to fund the purchase can engage in day trading. For a class of people, day trading is a full-time job.  Day traders are agnostic to the long-term implications of the security and motive is to benefit from the price changes on either side and make profit out of the asset price fluctuations within a day. They bet on price movements of the security and are not averse to take short positions to benefit from the fall in price.  Day trading is not only popular among individuals or retail traders but institutional traders as well, therefore the price movements are large sometimes depending on the magnitude of information flow and accessibility.  Everyone wants to make money faster, and many are inclined to speculate in markets, but it comes with considerable risk and potential loss of capital. People engaged in day trading also incur losses, and oftentimes outcomes are disheartening.  Day trading is a risky activity, similar to sports betting and gambling, and it could become addictive just like gambling and sports betting. Since the motive is to earn profits, the profits realised from day trading also tempt people to continue speculating.  People spend considerable time and efforts to make the most out of day trading. They have to continuously absorb and incorporate information flow, which has become increasingly accessible driven by new-age communications systems like Twitter, Facebook, forums etc. But not only information flows have been favourable, day traders are now equipped with best in class infrastructure to execute trades even on compact devices like mobile phones. The accessibility to markets is at a paramount level and gone are days of phone call trading and lack of information flows.  What are the essentials for Day Trading? Basic knowledge of markets With lack of basic knowledge of markets, day trading may yield unacceptable outcomes. It becomes imperative for people to know what’s on the stake. Prospective day traders should know about capital markets, and the securities traded in capital markets like bonds, equity and derivatives.  Buying shares and expecting a return from the price movements are on the to-do list for many. However, it is important to know about and risks and potential returns from speculating in capital markets.  After getting some basic knowledge about markets and securities, aspiring day traders should know how to analyse market prices of securities through fundamental analysis and technical analysis. Although day traders don’t practice fundamental analysis extensively, they spend considerable time to apply technical analysis, to formulate a entry and exit strategy.   Device and internet connection Trading is now possible on mobile applications as well as computer applications or websites. An aspiring day trader will likely begin with mobile phone given the accessibility, and laptops/computers are useful as scale grows larger and complex.  Internet connection is prerequisite to practising day trading, and it is favourable to have a fast internet connection to avoid glitches and potential problems. These perquisites are now available with large sections of societies.  Broker and trading platform A broker will facilitate a market for potential trades. The security brokerage industry has also seen a profound shift as technology has driven cost lower while competition is ramping up across jurisdictions. Large retail brokerages have moved towards zero commission trading in the U.S., and the same is seen being the trend across other geographies as well.  The entry of discount and online brokerages has perhaps given wings to the retail market participants as well as the retail market for security brokers. Robinhood has grown immensely popular in the United States, but there are many firms like Robinhood in other jurisdictions. Each country has some firms with business model on same lines as Robinhood.  Brokers now offer high-quality mobile applications and web services to clients, and trading security has never been so accessible. They also provide access to the global market along with a range of securities, including commodity derivatives, currency derivatives, CFDs, options, futures, bond futures etc.  Real-time market information flow   On public sources, market price information is at times not live due technical shortcomings, which will not work appropriately, especially for day traders. Brokers not only provide platform and market but several other services, including margin lending, real-time data, research.  Day traders closely track prices of securities and overall information flow to incorporate developments in bidding, and real-time data provides accurate prices throughout market hours.  Information flow largely relates to the news around the company, industry or economy. Day traders now have far better sources of information than the conventional sources, and sometimes these sources could be exclusive to a group.  What are the risks of day trading? Most of the aspiring day traders end up losing money, given the lack of experience and knowledge. They should rather only bet on capital that they are comfortable to loose, in short, they should avoid risk of ruin. Day trading is sort of pure-play speculation and application of knowledge, information flow, laced with good trading system is paramount. The only concern of day traders is movement in price, which contradicts from investments. Day traders try to time and ride the momentum in the price and exit the trade before momentum turns otherwise, which can happen frequently.  It consumes considerable time and induces stress on the individuals given the nature of security prices, which can move north and south abruptly throughout the day, hours, minutes and seconds. Day traders should have enough capital to trade in cash instead of margin.  Day trading on margin or borrowed money is extremely risky and has the potential to make a person insolvent, especially in cases of extreme risk-taking. The leverage associated with borrowed money magnifies profits as well as losses.  Aspiring day traders should equip themselves with adequate knowledge, competency and sound risk management process. Although fast money is dear to most, it is better to know what is at stake before jumping into markets with excitement.   

The de minimis rule is used to determine that whether the price accretion or price appreciation of securities bought at a discount will be taxed at the capital gains tax rate or ordinary income tax rate.

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