Vic Jokovic is Chief Executive of Cboe Australia, which recently acquired the Chi-X Asia Pacific business with plans to fully integrate it into Cboe’s global operations and technology platform. This is an edited transcript of a discussion on 2 March 2022.
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GH: Can you explain the significance of Cboe acquiring Chi-X Asia Pacific, especially for the Australian market?
VJ: Cboe coming into Australia is the first time a significant global exchange has operated here. ASX might take exception to not being branded a global exchange, but Cboe has offices in 15 countries and operates in over 25 countries including, obviously, the US. Cboe stands for Chicago Board Options Exchange, but we've got large operations in New York, London, Amsterdam. Tokyo and now Sydney. And so a very large, Australian-centric exchange, the ASX, is competing with a very large global exchange group with products that the ASX doesn't have within its tool chest.
GH: Most of our readers probably assume when they trade online through CommSec or nabtrade or another broker, that the deal goes through the ASX. When does it go through Cboe and when through the ASX?
VJ: About one-fifth of the Australian market is now traded on Cboe Australia. Let's go a step back and begin with an investor placing an order. There's a broker responsibility to achieve the best price at the time, the best execution. Some follow it to the letter of the law, others don't. It's a little loose in terms of interpretation but it means that the broker uses smart order routers to send that order to the exchange that has the best price at that time. And we set the best price in the market approximately 35% to 40% of the time. Brokers that are not connected to both exchanges - and there are a few that aren't - can't guarantee they’re delivering the best price to their clients. But it's seamless, investors don't see the mechanics. It's the broker’s responsibility to route to the best price at either ASX or Cboe.
GH: If I'm an issuer or company that wants to come to the market, such as a mining company, industrial company or an ETF, what's your pitch? What's the price competition you bring versus the ASX?
VJ: The pitch prior to the Cboe acquisition was simply price, like any disruptor. Our pricing schedule is significantly lower than the incumbent, which was previously a monopoly provider. We also had the advantage of being nimble and innovative. I know everyone says that but we were focused on what we wanted to be good at, such as ETFs and warrants, trading certain types of market order to make it easier and faster for the brokers. That was our value proposition. Going forward, we have a different set of pluses. We will introduce access to global products and that gives anyone listed on our platform over time the ability to have that product access right across the globe. It’s something that the ASX can't offer because it doesn't operate as the largest exchange across 18 markets in Europe, the largest derivatives exchange in the US and the third largest exchange in North America.
GH: Will Cboe have a strength or emphasis on certain types of products?
VJ: Yes. Cboe is the dominant global derivatives exchange but the Australian derivatives market is a monopoly held by the ASX at the moment. The options market has been stagnant in Australia for a long time whereas it's vibrant offshore. The ASX derives about $200 million a year of its revenues from a small number of contracts primarily across the futures side of their business, such as 3- and 10-year bonds, 90-day bank bills and recently, electricity futures. So, we will look at all of those. But for now, our focus will be on business-as-usual in trading shares and warrants - where we have 35 to 40% of the market, sometimes up to 50%. The ETF piece is obviously a key angle for us.
GH: What happened with the TRaCR product which was withdrawn recently? I liked the way investors could access great US companies directly on the local exchange. It seemed like a good idea. What's the potential for investing in global stocks through a normal Australian broker account with the FX handled automatically?
VJ: The advantage of TRaCRs was US mega caps denominated in Australian dollars in the Australian market. The product was going well with about $50 million in assets but it had taken two to three years to get there and it wasn't commercially viable for the issuer (Deutsche Bank) to continue. So, it wasn't a decision made by us and we tried other issuers but for a bunch of reasons, it didn't happen. It's a product that we may resurrect in future with a different issuer because I think there is a place for an ADR-style (American Deposit Receipt) product around global shares in Australia and the next port of call was going to be Asian and European names.
GH: Chi-X (Cboe) is well known in Australia for its range of Active ETFs. Do you see any new asset classes or developments in that ETF space?
VJ: Yes. We were at the forefront in innovation around the active space, certainly in fixed income funds. We gain the advantage that Cboe itself has about 550 listed ETFs with all the usual issuers, the big fund managers down to some boutiques as well. We're currently talking with a few global managers that are well known plus some lesser-known Australian fund managers, to bring unique product into Australia.
GH: Such as?
VJ: Such as commodities and obviously, crypto. One of the issues is that crypto is not a regulated market, so the concept of a crypto ETF listed on an exchange via ASX or Cboe is the next step, and we are very close. We have ASIC approval to quote a Bitcoin ETF, I think it will be the first crypto ETF offered on this side of the globe.
GH: As an investor, I like the convenience of execution on an exchange and avoiding the 20-page offer document of unlisted funds, the need for a certified copy of an SMSF trust deed and all the other paperwork. I just can't be bothered. Why have more fund managers not gone the listed route yet?
VJ: Good question. It's accelerated in the last 12 months and the pipeline is strong for us and the ASX. I wouldn't be surprised to see 50 to 100 new ETFs in the market over the course of the next 12 to 18 months. Our plans see us moving from our current 20+ funds to close to 100 by the end of 2023. I don't think we're flippant or aggressive in our forecasting, it's just the pipeline.
Why haven't fund managers done it before? I think it needed a few funds to lead the way and the listed space was traditionally the world of the passive index trackers. Magellan, Schroders, Janus Henderson, Perennial … they led the way. They get access to a broker market, the ‘Know Your Client’ and the other rigmarole is already done for these clients, so the process is easier. It’s the last distribution piece that these fund managers hadn't considered, and they have seen the success of others.
GH: Especially when Listed Investment Companies have problems not being able to pay stamping fees, so unless you're someone with a special marketing capability, like Geoff Wilson, a lot of those LICs or LITs done two or three years ago wouldn't be possible now.
VJ: Yes, and we've seen conversations (of LICs to ETFs) and some dual access models.
GH: Does Cboe target a particular part of the market, such as insto, retail or advisers?
VJ: The journey has shifted. When we first started, the most important client base for a new exchange was the brokers as we call them, the large investment banks. We started fishing there 9-10 years ago when Chi-X Australia first kicked off. Then the next step was connectivity to all stockbroking firms, including in some respects global, so we have 50 to 60 trading participants sending us and ASX orders every day. These brokers control 99% of daily volumes. Then as we moved into the ETF and ETP space, we needed strong connectivity into the wealth platforms as well.
We have a higher percentage of our daily volumes and value traded coming from retail brokers than the ASX. There’s a misconception that being a newer exchange, we are heavily reliant on high-frequency trading firms. That's not the case at all. The split with the ASX is similar but skewed for us to those big retail brokers.
GH: What's your strategy and communication with the financial advice industry?
VJ: It's a work in progress that's been happening over the course of the last few years. We have two salespeople that look after the retail piece and they're heavily involved with advisers.
GH: Where will the business be in three to five years?
VJ: Where do we want to be? While we compete with the ASX across two or three limbs, we don't compete in clearing and settlement, yet Cboe is a much larger clearing and settlement operator. We don't compete with the ASX in options and futures and Cboe is a much larger futures and options house. And corporate listings is the third key focus for us. They are huge projects.
The government, the RBA and ASIC are pro competition. They're supportive, particularly now that it's not a small exchange looking to compete in these areas. You know, exchanges are typically quite boring. It's hard to make an interesting story out of an exchange business but after 150 years of ASX essentially going on its own, this will mix it up a little bit.
I draw the analogy of an Aldi or whoever else coming in to compete with Coles or Woolworths or Uber shaking up the taxi industry or the telco industry after Telstra had the entire industry to itself. That's the upside. We just can't screw it up.
Graham Hand is Managing Editor of Firstlinks. Viv Jokovic is Chief Executive at Cboe Australia, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any person.
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