Rob Nash, head of equities relationship management at ASX: We are often asked about market structure so it might be helpful to start with what an average day looks like. The market opens at 10am with an opening auction. Although people can start placing buy and sell orders at 7am. Between 10am and 4pm we have continuous lit trading, which is trading everyone can see. At 4pm we have a 10-minute closing auction, which is easily the biggest liquidity event in the day. There are also opportunities to trade a certain type of transaction until 7pm when the market formally closes. Jenna, how common is trading outside of market hours?
Jenna Cork, a founding principal at Barrenjoey, and a trader within the equities division: It’s incredibly common and there’s a number of reasons why clients might want to trade late. I understand some companies are concerned trading after the market is shut could manipulate the last price. The short answer is it can’t. The last traded price on market during open hours isn't updated for any post-close trades.
Rob: I’ll just touch on limits on how much a stock can trade up or down. This is an area around risk management called volatility control. In Australia we don’t have an overriding cap at the top or bottom and top end but we do have an extreme trading range, or ETR, which is different for every stock. Both the exchange and the regulator monitor this very closely.
Rob Nash, Head of Equities Relationship Management at ASX
Rob: Short selling is another highly-regulated area. This is where an investor or trader borrows shares, registers them in their own name and sells them on in the hope of buying them back at a lower price before returning them to their original owner.
Jenna: Shorting can be more restrictive in Australia than in other parts of the world. But we also have a lot of freedoms here. The boxes that need to be ticked before a stock is short-sold are very important. These include disclosing the short sale at the time the order is placed, the broker flagging the executions as short when they hit the market, reporting the gross short sales to the exchange, and the net short sale positions to ASIC, both on a daily basis.
Rob: Now let’s touch on on-market or lit, and off-market or dark, trades. Dark trading is where institutional investors can trade stocks without revealing their intentions to the rest of the market.
Jenna: The main reason why an institutional investor would trade through a dark pool rather than the lit market is access to liquidity. For example, let’s say an institution wants to sell $10 million worth of BHP shares. If I keep offering my stock in the lit market it could send a signal there's a big seller and the price could collapse.
Jenna Cork, a Founding Principal at Barrenjoey and a Trader within the Equities Division
Rob: Moving on to electronic trading, can you tell us a bit about algorithms?
Jenna: I know that electronic trading sometimes gets a bad rap but I believe it can actually help maintain a fair and orderly market when used correctly. I use algorithms all day every day because I don't have the capacity to trade everything manually. A lot of your shareholders trade using algorithms. Brokers have a lot of checks, balances and filters in place to make sure that everybody does the right thing.
Rob: We’re seeing more high-frequency trading as more people gain access to powerful computers. This lets you place a buy order, place a sell order and amend or cancel an order faster than you and I can blink.
When ASIC did a review of this in 2018 it found high-frequency traders contribute positively to price formation, benefiting all investors in the market. They also provide important liquidity during market stress and peak demand.
Exchange traded funds, or ETFs, are also becoming more popular. They’re providing liquidity all day so their regulated market makers have to use software to ensure they're accurately reflecting the fund's value or the liquidity profile.
It all provides depth to the market, which benefits all listed entities and their shareholders.