The Australian Stock Exchange is by its own admission standing at the bleeding edge of innovation with a blockchain-based replacement for its post trade settlement system.
The organisation last week released its industry consultation paper providing more detail about the new platform.
That gives important guidance for industry about when it needs to be ready, and the systems it will need to connect to the new platform now slated to go live late in 2020 or early in 2021.
Developed in association with New York based Digital Asset, the ASX greenlighted the distributed ledger technology (blockchain) project late last year.
CHESS (Clearing House Electronic Subregister System) was developed in the early 1990s, and was one of the first systems in the world able to dematerialise shares through digitisation.
ASX chief executive officer Dominic Stevens sees the move to blockchain as the next innovation step-change that will strip risk and friction out of the post trade settlement associated with $1.5 trillion of equities trade each year.
“That is a very significant use case,” he says.
The blockchain system being constructed will have ASX host a central database, while exchange participants will take a node to that database, to confirm instantly that their records match those of the ASX.
“All those participants don’t have to reconcile any more – that will reduce risk, reduce time, reduce cost,” says Mr Stevens.
But he also sees the new platform as an innovation engine for the entire financial sector in Australia.
“The thing that I think is probably the most profound …is that if everyone had a node to the same database that means the platform that everyone is working on is the same,” he said.
“So, if Westpac produces the software to produce something on that database, then it will work for UBS and Deutsche Bank. Any technology that a FinTech might provide that sits on that platform would actually work across anyone’s systems. It allows technology to flourish on top of the platform.”
The consultation paper is the result of a year-long process involving six working groups that explored what the industry wanted from the new platform, before narrowing that down to the 50 business features that the industry most wanted.
It outlines which of those features will be available on day one and acts as a roadmap to the future.
Submissions regarding the consultation paper are sought by 22 June.
Mr Stevens says that once the platform is completed, it is envisaged there will be 6-12 months of parallel running to iron out any bugs before CHESS is finally decommissioned.
Ultimately he suspects a similar blockchain based solution could be developed for the Austraclear bonds platform.
Right now though he accepts that the ASX has taken up a position on technology’s bleeding edge. “We have form here – we were probably the first one to take the first step at dematerialising securities in the early 90s. This is the next stage of that.”
Having invented its own future and dramatically shaken up the securities space with CHESS in the 1990s with a bespoke settlement platform, the ASX actually can’t buy anything off the shelf to replace it because it is a name-on-register system rather than the more conventional custodial based system.
“We can’t go and buy a US system to replace CHESS – they don’t exist. We have to create a new CHESS and our system is better than those around the world because it has a lot more information in it.”
Mr Stevens says the ASX decision to go with blockchain has also upped the innovation ante for the local offices of international finance companies which connect to the ASX.
“We have had hundreds of conversations with customers that are very excited about what this can do. We have had people from New York, London and Hong Kong down here.
“Local people in operations suddenly have the London people asking what’s going on – they are becoming more important in their global operational hierarchy.”
While the blockchain project is ASX’s big tech bet, it is also exploring how to use artificial intelligence for textual analysis of ASX announcements.
While both ASX and ASIC use sophisticated data analysis platforms designed to sniff out unusual trading patterns that might point to insider trading, Mr Stevens says the ASX is also interested in technology to make sense of market announcements and determine what is and what is not considered material.
Mr Stevens said that the ASX’s use of data and the establishment of the Australian Liquidity Centre (ALC) at Artarmon, NSW – essentially a specialist data centre for financial markets operators – were further signals of its appetite for innovation.
Around 130 financial services organisations use the ALC today and are each connected via a 65 metre cable to the ASX’s matching engines.
That short cable ensures everyone has equal access and experiences the same latency which is critical for high speed trading.
While the efficient operation of the ASX is critical to Australia’s economy, it is also an engine of wealth for technology startups mature enough to consider listing.
Mr Stevens stresses the importance of timing; “You only get a chance to list once – if you get there and roll over because the business needed a few more years before it got to the point where you are on a steady footing, you could ruin your story.”
Technology companies with a good story to tell though will find a receptive local market he said.
With more than 200 technology companies listed on the ASX it is big enough to attract investor interest, but not so big that local companies get lost as they might on larger international exchanges according to Mr Stevens.
“If you are purely technology, it’s hard to get noticed on the Nasdaq even if you’re quite a significant company. A great example is WiseTech. It listed at almost $billion – now it’s around $3 billion.
“On Nasdaq it wouldn’t hit any indices where it’s in the ASX300 – maybe heading to the ASX 100 so there is coverage from research, passive funds and the like.”
He also believes that Australia’s mining history has instilled an appetite for risk among local investors.
“We are one of two Exchanges in the world, the other possibly being Canada, where there has been more of a venture market in the fact that Australia has been built on companies asking ‘can you give me money to go out and drill a hole and let’s see how this hole goes’.
“Actually the market is comfortable with ‘yes – there is a good chance we will dig this hole and find nothing’.”
How comfortable remains moot.