According to Morningstar analysts, the ASX’s decision to move its cash equities clearing and settlement system (CHESS) to distributed ledger, or blockchain, technology would further strengthen the exchange’s “strong competitive position”.
“Although DLT has enormous potential, few real-world examples of DLT use have emerged which makes ASX somewhat of a leader in the space, being the first stock exchange to commit to DLT in a meaningful way,” the report said.
The new system would have a number of benefits for stakeholders and stockbroking firms in the form of administrative savings as well as “richer, more timely and more accurate data”.
“ASX currently generates around AUD 100 million or 13 per cent of group revenue from clearing and settlement of cash equities which we expect to benefit from the new system via the monetisation of new functionality and services.”
The adoption of blockchain technology would further cement the ASX’s protection against competition, identified as “regulation and network effects”, the report said.
“The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome.
“A government report found that even if competition were allowed in cash equities clearing, competitors are unlikely to emerge, as the regulatory requirement to maintain operations and regulatory capital in Australia reduce potential synergies for overseas clearinghouses.”
And even if the regulatory barriers were removed, a ‘network effect’ would still provide the ASX protection against competition, the report indicated.
“Competitors can easily create the technology required for a rival exchange, but investors are unlikely to switch to a less liquid market.”
The report pointed to the attempt of the “sole viable alternative exchange to the ASX”, Chi-X, to launch a rival equities exchange in 2011, which only attracted market share of 10 per cent and “appear[ed] to plateau due to a lack of market depth”.
Furthermore, the technical aspect of integrating local market participants such as stockbrokers would then create “switching costs”, which would also dissuade them from moving to another securities exchange.
However, the report also signalled that lack of competition had served to somewhat “undermine” the ASX as it led to “a culture that lacks innovation and efficiency”, and that blockchain could serve to pose a “material threat”.
Nonetheless, the ASX’s willingness to explore the implications of new technologies, capital-light business model, high dividend payout ratios, lack of appetite for acquisitions, debt-free balance sheet and strong cash conversion all meant it had secured a “monopoly in the Australian primary listed equity market”.
The ASX announced it was investing in blockchain technology firm Digital Asset in January 2016.
