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The ASX and the future of trading

Investing 101

It has been a difficult for years for the ASX, operationally at least, with a number of high-profile market outages impacting on trading and then the launch of their new website receiving negative feedback. Despite all the headlines the company remained remarkably resilient during the pandemic sell off, recovering short-term losses quite quickly and subsequently benefitted from a boom in retail trading activity.

Since nearing an all-time high in August the company has struggled to gain traction with the rotation into vaccine-led value stocks ignoring the monopolistic nature of the company. The group is now among the top 10 stock exchanges in the world by market cap despite Australia representing just 2% of all listed companies. Whilst the launch and recent takeover of Chi-X is a strong competitor, the operating leverage and strong position means the group will continue to benefit from a monopolistic market structure.

ASX trades on a P/E of 31 times 2020 earnings, not cheap by any means, but broadly in line with global counterparts like the Intercontinental Exchange (NYSE:ICE) which operates the New York Stock Exchange and Futures trading among others. The group has built a diverse revenue stream over many year, with their first half revenue of $470 million coming from Listings and Capital Raisings, $127 million, Trading, $130 million, Derivatives and Over the Counter, $144 million and post trade services like CHESS statements, $68 million.

  • The opportunity for the ASX lies in the future, however, where they are investing over $100 million every year in innovation and seeking further digitalise the entire trading and settlement experience. Cryptocurrency has been gaining all the headlines in 2021 as digital assets see massive volatility. Whilst there is little agreement on the future of this ‘asset class’ there is clear agreement on the value of Distributed Ledger Technology or the blockchain.

    In 2015, the ASX commenced a process to seek alternatives to its CHESS platform, which supported the registration, tracking and settlement of individual shareholdings and trades. This resulted in a partnership with global DLT specialist, Digital Asset, who are building a full replacement to CHESS which is set to go live in 2023. It has been a difficult few years for CEO Dominic Stevens attempting to sell this to shareholders, but with beta testing now occurring, the day is not far away. He was quoted as saying that the ASX blockchain will ‘host more value than all public blockchains powering global crypto markets’.

    Expanding, he says that “ASX’s data strategy was less about how ASX interacts with a customer and more about how the ecosystem interacts with itself”. “We want to make that a more collaborative ecosystem of data.” And the opportunities are significant, with blockchains offering immediate and public proof of ownership, shared data and a more efficient way of doing business.

    This theme continues with their recent investment in Grow Inc. The company commenced as a superannuation fund but has pivoted to providing infrastructure to other super funds and utilised the same DLT assets to deliver a range of services. For instance, they were recently appointed administration for Vanguard’s entry into the Australian superannuation market.

    The investment platform sector including the likes of Netwealth and Hub 24 have been among the top performing companies in the last few years, as they continue to attract advisers and their clients due to their reporting and implementation benefits. The ASX has operated a system called mFunds for some time but failed to gain significant traction due to a number of brokers not registering for the platform. Effectively, the structure allows investors and advisers to buy funds using their CHESS registration, which in a similar way to Exchange Traded Managed Funds, could offer an insight into the future of this company.

    The brokers are highly negative on the ASX at the moment, with two sells and five holds, and not a buy to be seen. Their focus is on the greater competition from Chi-X and the series of missteps in recent years. They highlight the slowing growth rate and mature nature of their business, at least in the short-term. This may be one to watch. 

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