What is Chi-X and how does it work?

Chi-X Australia has come a long way since its launch in November 2011.  As Australia's first alternative trading venue to the ASX, it began with a little as 8 tradeable stocks to now offering the full suite of 2,100 ASX-listed companies, and has recently launched its own Warrants market.

Today Chi-X Australia accounts for 20% of the total ASX trading volume, and as much as 30% of the total volume of some big cap stocks such as Telstra, and 30-40% of A-REITs (Australian real estate investment trusts).   See this week's most traded stocks on Chi-X  on the Fidessa Fragulation Index.

While all this is great, I thought it was time to get back to basics about what Chi-X actually is and how it works.  Since OpenMarkets became a participant of Chi-X back in May, I've had a number of people ask how it's possible to trade ASX listed stocks on anything other than the ASX and why you would?

So let's get back to basics...

What is Chi-X?

Chi-X Global is a consortium-backed operator of alternative equity trading venues that competes with primary exchanges. It pioneered the introduction of new and competing trading venues in Australia, Canada* and Japan, and previously in Europe (now operating as BATS Chi-X Europe).  *News Flash this morning: Nasdaq acquires Chi-X Canada

In Australia we have Chi-X Australia, a competing stock exchange to the Australian Securities Exchange (ASX) and alternative venue where you can trade the full suite of 2,100 ASX listed companiesBeing a stock exchange, Chi-X can also develop new products of their own, which they have recently done with their new Warrants market and suite of ETFs next year.  See What's Next for Chi-X

Check out CEO John Fildes explaining What is Chi-X in the video below.

 

Chi-X is to ASX like what WoolWorths is to Coles

It's similar to deciding which supermarket you want to buy a jar of vegemite from, but in our case we're buying stocks.

If your broker is connected to Chi-X, you have the choice to buy your stocks (or place your order) on either ASX or Chi-X, where the end product (the parcel of holdings) is exactly the same.

What you can trade on Chi-X What you can't trade on Chi-X
  • Full suite of 2,100 ASX listed companies.
  • Their own unique Warrants market (just announced). See announcement.
  • Coming in 2016: Innovative range of ETFs

All other ASX's listed products (ASX Warrants, ETFs, XTBs etc)

 

                                                        

Chi-X trades can be sold on ASX, and vica versa

Since Clearing and Settlement is still facilitated by the ASX, any stocks you buy through Chi-X will settle on your CHESS HIN or directly with the share registries.  This means you can sell the stock back through either exchange.

 

Why trade through Chi-X?

It has an 'Integrated Order Book' at no extra cost

Unlike the ASX, Chi-X has an "integrated order book", which means its 'lit' and 'dark' markets work together. So when you place a trade on Chi-X, the trade will look at both its lit and dark markets (Mid Point) to fill your trades.

It is often in the dark market(s)* that traders can uncover hidden liquidity i.e. more shares, at a fraction-of-a-cent cheaper price than what's showing in the visible market depth.  This is particularly relevant for day traders or high-volume traders, where a fraction of a cent can result in significant cost savings.

Chi-X_MidPoint-Diagram-Telstra-Example.jpg

Compared to when you place a trade on the ASX, it will only look for fills in their lit market (ASX Trade Match).  To benefit from ASX's own dark market (Centre Point), you have to put your trade on separately, providing your broker is connected to Centre Point, and it'll cost you more. (Or at least, ASX charged us brokers more for that transaction.

In saying that, a trading platform that has a Smart Order Router like IRESS and shortly, Pulse, will allow you to have the best of both worlds. It will actually scan both ASX and Chi-X lit and dark markets in the blink of an eye - looking for the best price and fills across all markets.

It costs less to trade

For us brokers, the cost of execution on Chi-X is lower:

  • Limit Order:  0.06bps (passive ) or 0.12bps (aggressive) per trade compared to ASX’s 0.15bps
  • ASX charge for Centre Point0.50bps per trade, whereas Chi-X doesn't charge extra for accessing its Mid Point market
Some brokers, such as OpenMarkets, may pass that saving back to traders using Chi-X by way of a reduced brokerge fee.

It offers 'price improvement' opportunities

Because of Chi-X's integrated order book, trades can often be executed at a better price for both buyer and seller.  For example, if you put a limit order on Chi-X. it'll check its Mid Point market (dark market) to see if it can get a better price for you (referred to as trading 'within the spread').  These price improvement opportunities, though often individually miniscule, mount up particularly for active traders. 

Chi-X claims to have already saved investors more than 30 million dollars this year through price improvement opportunities.

It has shorter queue times due to its 'day only' system

Particularly among the heavily traded stocks, making your way through the order queue can sometimes cause costly delays.  In busy periods, it can take up to 20 minutes for orders to reach the front of the order queue on the ASX.  The problem is far less pronounced on Chi-X with its day-only system meaning no orders rest overnight, so all stocks open at 10am allowing for queue priority daily, promoting faster execution.

It has a "Market on Close" order type that extends trading by 8 minutes

Chi-X has introduced a unique order type called Market on Close (MOC) which allows you to trade 8 minutes after normal market hours. Watch John Fildes explain MOC

How to trade on Chi-X

Although most online brokers are connected to Chi-X not every trading platform they offer is, so you'll need to do your homework.  Here's a short list of brokers suited for retail traders that are connected to Chi-X.

Broker Trading Platform
OpenMarkets        IRESS Pro, IRESS Trader, Pulse & WebTrader (Jan 2016),
ETrade Etrade Power, ETrade Pro
CommSec CommSec, CommSec IRESS
Amscot AmscotOnline IRESS

See full list of Chi-X Brokers

If your broker platform is connected to Chi-X, you'll be able to select the market in the Order Pad.

Or alternatively if you have access to smart order router (SOR) capabilities, you could select that destination and your trade could potentially get filled across multiple markets - Chi-X, Mid-Point, ASX TradeMatch, Centre Point.  The purpose of an SOR is that it will automatically scan across all available markets looking for the best price.

 

Where to next for Chi-X?

New Warrants Market just launched

Chi-X recently announced the launch of its own Warrants market, which are uniquely tradeable to Chi-X.  Read Warrants Booklet. That means unlike the 2,100 ASX stocks, you can only sell them back through Chi-X.

New ETFs & Tradeable Indices - coming in 2016

In the first half of 2016 Chi-X plans to introduce a range of tradable indices for SMSF investors in particular, and then broaden the market to Exchange Traded Funds.  These new products are aimed at offering more choice, opportunities for leverage, opportunities for access to offshore markets and valuable risk management and diversification strategies to Australian investors.


CONCLUSION:

Introducing competition in trading venues is good for financial markets and the global trading community. It challenges the monopoloy of the primary exchanges in that country, exposing any excessive costs and lowering them. It promote fairness and transparency in the way it is regulated, but most of all it encourages innovation.

Chi-X's launch four years ago not only prompted the halving of trading fees but also widespread trading infrastructure upgrades, lower latency and the introduction of new 'dark markets' such as Mid-Point and consequently, ASX's Centre Point.

This competition has done a great service to our stockbroking industry, benefitting not just the big instos but retail traders too.

I'm looking forward to seeing what Chi-X continues to do over the next few years!


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