a change to trading screens from today!

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    Nobody will know who's selling

    November 28, 2005

    Broker screens used to identify buyers and sellers. But no more. Anneli Knight reports.
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    THE Australian sharemarket is about to undergo its most significant transformation in over a decade.

    As trading screens across the country spark into life, poised to start trading at 10 this morning, there will be one notable difference. Brokers will no longer be able to see which firms are placing orders or making trades. The broker identifier code will be replaced with a generic identifier, "777-7".

    "This is the biggest change in the market since we went electronic," says Goldman Sachs JBWere's head of institutional sales, Patrick Crabb. "Exactly how the market behaves will be very interesting."

    This simple technical change has divided the industry in fierce debate for the past two years. And there are those who argue the Australian Stock Exchange needs to go even further to overhaul the system.

    Over the past two weeks brokers have devoted time and resources meeting clients to discuss how they expect this single masked field will affect the way they do business. But no one really knows what is going to happen when the market opens this morning.

    Supporters say it will bring greater liquidity to the market and put all investors on a level playing field. Detractors argue it will unnecessarily reduce the amount of information available, remove transparency and increase market volatility.

    Either way, it will change the way many Australian investors make their decisions.

    Retail brokers have made the loudest criticisms.

    "Having less disclosure, rather than more disclosure, [is] contrary to the thrust of where the market should be going," says Chris Burrell, of retail broker Burrell and Associates. "This is an industry that has been subject to enormous regulation. One of the things that keeps this industry very honest is that everyone sees what everyone else is doing."

    As of today, brokers will need to purchase reports from the ASX to determine who has been making the trades. One report will be available soon after the market's close and will reveal the total market share of each broker for the day. A second report, available three days after each trading day, will disclose the aggregate number of transactions in each stock by each broker.

    "It will actually cost us more to receive less valuable info," Burrell says.

    Investors using online trading systems have never had access to broker identification information and this divergence of access to information has been one of the ASX's strongest arguments for removing the information from the entire market.

    Brett Spork, chief executive of E't expect the new system will significantly affect business but believes it will introduce a perception of fairness.

    "Now [online] retail clients are on the same playing field as the big boys are," Spork says.

    "It is important to be consistent, with no advantage, real or inferred."

    Institutional brokers generally support the change, saying it will be easier to place large orders without other firms trying to profit from second-guessing trading strategies or market positions.

    The head of sales trading at UBS, John Garrett, says removing broker IDs will make individual orders less obvious to the market.

    "It should make it easier for institutions to execute large orders and have less market impact," Garrett says.

    "Brokers should be able to manage their risk more effectively and provide better prices [to clients]."

    But there are divergent views even among institutional brokers.

    A senior trader at one of Australia's premier firms worries decisions might be made rashly on less information.

    "It could lead to more volatility as people try to guess what is going on," he says. "Brokers will have less information to deal on and a bad sell is better than no sell. There can be a tendency to jump in for fear of the market trading away from you.

    "This system is one of the most liquid and easy to deal in markets in the world, so was there a compelling reason to bring about a large change?

    "With continuous disclosure by companies and a very liquid market it is hard to see how retail investors would have been disadvantaged under the old regime," he says.

    Morgan Stanley chief executive Steven Harker supports the initiative, saying it is necessary to reduce the increasing incidence of front running.

    But he says the international reputation of the Australian stockmarket is at stake if more isn't done to reform the system.

    The stock exchange must introduce measures to reduce the incidence of principal trading, where brokers undertake proprietary trades for no commercial purpose, simply to boost their market share and give the impression they have been active in a certain stock or in the market as a whole, Harker says.

    "Australia has so much going for it in terms of being a robust capital market but it is known around the world amongst its client base for its market participants engaging in principal activity and it is totally unnecessary. Why risk our global reputation," Harker says.

    The ASX market rules specifically forbid trades that create a false or misleading appearance of active trading, although disciplinary action is seldom taken.

    In 2002, while firms were competing to win Telstra business from the Federal Government, the ASX mounted a strong campaign warning firms against constructing dubious trades to boost market share.

    Two years later Goldman Sachs was fined $85,000 for trades it made during that time (before it merged with JB Were) for entering bids and offers at the same price for no apparent commercial outcome.

    Many traders openly acknowledge this practice is still common but without public details available regarding specific trades and prices, there is little way for the stock exchange to monitor it. And the commercial advantage of holding a top spot in market share remains.

    "The better way to stop that activity is for the ASX to disclose principal versus agency trading, which can be easily done within its software," Harker says.

    "The ASX has never disclosed market share numbers broken down between principal and agency business. My view is that it should."

    An ASX spokesman says this issue has been considered but no decision has been made.

    "There have been a number of suggestions over the years to separate or more clearly mark proprietary trading from agency trading and the ASX has consulted industry participants about the issue before," he says.

    "At this stage, a clear industry consensus on the issue is yet to emerge."

    Despite the lack of industry consensus, the ASX - which generates fees from the volume of trades - is proceeding with the removal of broker identifiers.
 
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