ASX’s monopoly to be challenged as Cboe Global Markets acquires Chi-X Australia

Alternative securities and derivatives exchange Chi-X Australia plans to increase its stronghold on the domestic share market after securing one of the world’s largest exchange holding companies as its new owner.

Chi-X Australia’s current owner, private equity firm JC Flowers & Co, announced today it had agreed to sell parent company Chi-X Asia Pacific Holdings Ltd to trading solutions provider Cboe Global Markets Inc.

Headquartered in Hong Kong, Chi-X Asia Pacific operates equity trading venues in Australia and Japan and is the holding entity for Chi-X Australia; Chi-X Global Technology Philippines; and the proprietary trading system Chi-X Japan.

Since acquiring Chi-X Asia Pacific in February 2016 for an undisclosed amount, JC Flowers said it had enhanced the technology platform and grown the consolidated gross revenue for its core business by more than 85%.

Taking over the reins

Now the $14.5 billion listed Cboe – which owns the Chicago options exchange and various other global bourses – is set to take over the reins and shake-up an Australian monopoly which has endured criticism for a string of outages and technology flaws.

The most recent outage was in mid-November, when software issues in the first 30 minutes of trade forced the ASX to close for four hours.

It was the longest shutdown for the exchange in over a decade, separating investors from the markets for almost a full trading day and potentially breaching its market licence obligations.

The event led to ASX leaders being called to front an enquiry by the Australian Securities and Investments Commission and the Reserve Bank of Australia.

Single point of entry

Cboe chairman Ed Tilly said the Chi-X acquisition would provide Cboe with a single point of entry into the key capital markets of Australia and Japan, and help expand its global equities business and products into the Asia Pacific region.

It would also extend new block trading system BIDS Trading into the region, giving institutional investors another avenue to buy and sell large chunks of shares.

“There is a uniformity we are building across the globe and geographic expansion is key to us,” Mr Tilly said.

“If a region is open for competition, we really are looking to be there in scale.”

Cboe plans to fund the Chi-X acquisition with cash on hand, supplemented by existing credit agreements, and is aiming for closure of the deal later this year pending a regulatory review.

The purchase price is not material from a financial perspective and is expected to be nominally accretive to the company’s adjusted earnings in 2021.

Second largest exchange

Since its establishment in 2008, Chi-X Australia has become the nation’s second largest securities exchange achieving an 18.4% total market share and offering trading in all Australian-listed securities, as well as exclusive access to its quoted warrants and exchange traded funds.

Over the past five years, the company has doubled its revenues and become profitable, boosting competition and introducing new products including transferable custody receipts which give Australian holders a beneficial interest in US shares.

Whether it succeeds in delivering much-needed competition for Australian investors remains to be seen, according to Chi-X Australia chief executive officer Vic Jokovic.

“This deal would definitely increase exchange competition given Cboe’s broad capabilities, but [the ASX] is a monopoly provider and does what it can to hold on to and grow its revenues,” he said.

“Brokers, institutional clients and probably mums and dads want competition because they’ll benefit from pricing tension.”

Catalyst for change

ASX chief executive Dominic Stevens believes Chi-X Australia had been a catalyst for a change in the exchange’s culture and forced it to create new products such as dark pool matching system Centrepoint.

But he says in the short term, Cboe’s ownership of Chi-X will “probably not make much difference” to the ASX’s business.