Meet the alternative Australian exchanges

It may come as a surprise, but the Australian Securities Exchange isn't the only local exchange where investors can buy or sell shares in Australia.

And expect to hear more about them over time as the other equities exchanges ramp up their efforts to become more attractive trading propositions.

There are all types of alternative exchanges and markets out there, some operating purely behind the scenes.

One which certainly wants to make itself known, however, is the National Stock Exchange (NSX), which rolled up the Bendigo and Newcastle stock exchanges and is located in the heart of Sydney.

Both of the former exchanges were among the oldest in Australia, with Bendigo stemming back to the gold rush days in the 1870s, and Newcastle to the 1930s. Two of its most famous listings were Golden Circle and Sunrice.

Now operating as the NSX, the quest is to give the ASX a run for its money. CEO Ann Bowering (pictured below) admits the exchange had stock liquidity issues in the past, but a newly appointed executive team hailing from ASIC, Nasdaq and the ASX is working on taking the trading market to the next level. The NSX has turned its focus to “building a comparable framework to the ASX” with the stockbroking community its secret weapon.

Down the road, the Sydney Stock Exchange (SSX) is also working on “developing areas of expertise”, specifically by being the local exchange that provides a gateway to Asia.

Both the NSX and SSX appointed new CEOs in September last year. Bowering took the head job after eight years with the NSX, while Tony Sacre left his executive role in international business origination at ANZ to become the inaugural SSX CEO.

How do alternative exchanges work?

Investors trade equities on the NSX and SSX through brokers, and the exchanges are regulated in essentially the same way as the ASX. The financial disclosures are the same, and so too is the information provided to investors, from the perspective of integrity and diligence.

A key difference is the NSX and SSX will let companies float with 50 investors, while the ASX imposes a minimum requirement of 400 investors on a company wishing to list. 

Smaller companies might be attracted to these exchanges because of these lower barriers to entry. Bowering says, historically, the NSX has been a good fit for agricultural, resource and tech companies, as well as small-to-medium sized finance companies.

Last financial year there were 14 new admissions to the NSX. Of these, only two are trading down on their listing price; others have stayed quite steady, and a handful have seen their share prices more than double.

“Our consultative approach to IPO is what makes us attractive to some companies, where their management typically haven't taken a company public before,” says Bowering.

“We help identify issues early on to make sure the listing process is more efficient, even if that means identifying the company won't make it, so they avoid spending a lot of money on an IPO process if they are not ready to list.”

The NSX has alliances with more than 20 brokers, which means the likes of Bell Potter Securities, Patersons and Morgans Financial will trade NSX-listed equities at a client's request.

It's not quite as accessible for retail investors using electronic brokers. NSX-listed stocks can be traded on Open Markets, which is a relatively new entrant in the broking space, but Bowering says her team is working at bringing on board larger brokers including CommSec and Bell Direct.

Problems of the past

Earlier this month, IRESS Australia approved NSX-listed stocks to sit next to ASX-listed stocks on its platform — which Bowering describes as an “extremely significant” development.

With IRESS providing the wealth management software and trading system that many Australian brokers have come to rely on, Bowering says this addresses the problem of liquidity.

“It means our securities can soon be traded exactly the same way as ASX securities, where on the broker screen both stocks will be listed next to each other,” says Bowering.

“In essence, that brings the trade down to being about the strength of the company more than anything else. When a retail investor wants to know the latest opportunities in agriculture, or the medical device space, the broker can talk to both ASX and NSX listed companies.

“It will take a couple of months to roll out across the broker base, but the industry is confident about the difference having IRESS will make for the NSX, and it is extremely significant.”

Capilano Honey and Murray Goulburn are regarded as NSX success stories on its website, both of which used the exchange as a springboard to the ASX.

Bowering concedes a migration could indicate NSX success, but perhaps stemming from her belief the exchange is enough in its own right, she describes “trade sales, in particular, as a marker of NSX success”.

“That's because, in the past, migrations to other exchanges have probably been a function of our liquidity, although now we have taken strong steps to resolve that,” says Bowering.

“We have actually seen companies go the other way too, from the ASX to NSX, and over the next six months there will be more companies doing that.”

Waves of liquidity

Meanwhile, Tony Sacre (pictured below) says the SSX is also trying to catch a wave of new liquidity — a wave coming from Asia, to be exact.

The SSX has just five companies on its books at the moment that retail investors can trade through brokers, and it has a similar number of broker alliances to the NSX.

In the next 12 months, Sacre hopes to add another three revenue streams. He thinks there's a broad opportunity on the exchange for technology, mining, healthcare and agricultural companies, as well as real estate investment trusts (REITs).

He doesn't mention financial companies off the bat, but clarifies they largely come under the technology banner, and naturally focusing on Asia warrants a turn to fintech.

“This doesn't just mean Australian investors will be able to buy shares in more Asian companies on the SSX, but it's also about being able to buy shares in Australian companies whose products are going to Asia primarily,” says Sacre.

“We are tailoring our product offering, and from what we're hearing, the demand is quite strong. It's good to differentiate from other stock exchanges — I don't like the word niche, but it's the idea of developing areas of expertise.”

Behind the scenes

Beyond the NSX and SSX, there's another secondary stock market, if you will, operating behind the scenes. Chi-X Australia has a market share of more than 20 per cent, but you probably wouldn't know it, unless you were a broker or sophisticated investor.

Retail investors with brokers might be interested to know their trades could go through either the ASX or Chi-X, depending on where the broker chooses to execute for cost effectiveness. Likewise, retail investors using online brokers, like CommSec and nabtrade, could discover their trades are transacted similarly.

Because of its name, Chi-X has been confused as a China-centric exchange that's an alternative to the ASX. But it's nothing of the sort.

The Chi-X platform got the go-ahead from the Federal Government in 2010, and was approved by ASIC the year after. Retail investors might become more familiar with Chi-X as it expands its product offering over the next year to add more exchange-traded funds (ETFs). Currently around one-third of all ETFs in the local market are traded through Chi-X.

Chi-X recently became the exclusive host of transferrable custody receipts (traCRs) in Australia, which are products available through brokers and based on an underlying asset that is a member of the primary index in a specific offshore market.

Basically, it means Australian investors can invest in some of the world's biggest companies in Australian dollars, on an Australian exchange, protected by Australian regulations.

Competition equals innovation

There are very few monopoly markets in Australia like the ASX. As with anything, investors benefit from choice, and the more competition, the merrier.

Bowering references Coles-Woolworths, Telstra-Optus and Virgin-Qantas as classic examples of co-existence at its best.

“We know competition is fundamental to drive innovation, and in markets where there is no competition, innovation is stagnant,” she says.

“In terms of financial markets, at the end of the day, it is the retail investor that pays the price through increased trading, clearing and settlement fees because of a lack of innovation in the space.

“We think there is a lot of opportunity to see the [local exchange] industry evolve in the next five years as we push forward and start to challenge the way things have been done in the past. It's already a very different environment to what it was 10 years ago, where now there is an expectation around real-time information, more proximity and greater engagement.”