Research in Finance

Optimal financial market design underlies the mandate of every regulator in the world.

Indeed regulators are required to attest to the fact that all market design changes (i.e. changes in technology, regulation, information, participants and instruments) are assessed and pass the dual tests of fairness and efficiency. While the CMCRC has to date concentrated on the needs of regulators, exchanges and brokers, the extended research program will be broadened to focus on the needs of listed companies and asset managers, the latter acting as important intermediaries for end investors. It is important to note that while these participants represent the key stakeholders in capital markets, they have to date had little or no effective influence on market design itself. Indeed they have had to accept the implications of market design changes imposed by others, often to the detriment of the cost of raising capital and investment returns. Achieving effective participation in market design by these stakeholders necessitates access to expertise, data, analytical solutions and the program of engagement offered through our PhD program.

For asset managers, High Frequency Trading has become a significant concern as they have sought to cope with this new development in Australian markets. While our research suggests that aspects of their concerns may be misdirected, we believe that in the area of transaction costs (one element of market quality) their concerns are warranted. The program will pursue solutions through the development of a new high frequency trading transaction costs service that will be delivered via the Market Quality Dashboard. We will also introduce our own algorithmic trading stress-testing platform, supported by human capital and visualisation techniques to aid asset managers’ comprehension of the issues.

For listed companies, the research program will initially focus on the immediate needs of boards and senior management who are seeking to better understand what drives the price of their securities. Here we will introduce and adapt our leading-edge natural language solutions, developed over the past four years for Fairfax Media. This capability will be incorporated into the Market Quality Dashboard to enable companies to better understand how various forms of media (e.g. company announcements, formal media and social media) may be impacting their security. We anticipate that aspects of this development will then be directly usable by the investor relations departments of listed corporations. This provides an additional commercialisation opportunity, which could be taken to international markets in conjunction with industry participants particularly NASDAQ, who have recently acquired the investor relations business of Thompson Reuters.

The achievement of optimal market design requires access to appropriate data and analytical solutions that utilise this data to assess market integrity and efficiency. The pioneering efforts of the CMCRC have produced two essential building blocks for supporting optimal financial market design. The first, the Reuters Tick History Service, now operated by industry participant, SIRCA (Securities Industry Research Centre of Asia-Pacific), represents the world’s most significant repository of capital markets data and permits researchers to study financial market design changes in almost every market. The second, the SMARTS market surveillance system, originated the definition and operationalisation of market fairness. This solution, now deployed into exchanges, regulators and brokers across 40 countries, not only drives operationalized market fairness on a daily basis, but also provides a key tool to policy makers and researchers for the study of comparative fairness across markets.

The key commercialisation output from this program will be the Market Quality Dashboard (MQD), which will converge essential data with analytical solutions addressing both the efficiency and fairness of markets, dimensions broadly referred to as the Market Quality Framework (MQF). While this platform will service our core industry participant base in exchange-traded markets, it will also be adapted for the needs of other capital market trading venues including OTC (over the counter) markets, specifically derivatives, energy and property markets.

While the impact of the CMCRC’s research program on markets outside of Australia is already significant, what has been achieved to date should be viewed as a stepping stone to the future. In January 2013, the CMCRC established the European Capital Markets Cooperative Research Centre (ECMCRC) with the goal of enhancing market quality in this troubled, but vitally important region of the world. Initial collaborators are 12 university participants across Europe with the number expected to increase through time. Through bootstrapping this organisation and providing access to our data infrastructure and Market Quality Framework, the CMCRC will deepen and broaden research opportunities for Australian and European researchers, as well as facilitating the export path for our commercialisation activities.

Latest Finance Research

When the price of a listed security changes by an abnormal amount, the ASX typically issues a price query (PQ). There are two possible explanations for an abnormal price change.

In the US, shareholders can form a class action to sue a company under S10b-5 of the Securities Exchange Act for allegedly releasing misleading information, or for failing to disclose material information. The substantial cost of litigation, and its associated impact on shareholder value, has prompted debate over whether to reform access to the shareholder class action mechanism. However, the debate is as yet unguided by any study of the long-term financial impact on firms involved in litigation.

Solvency II is a European Union (EU) legislative program that introduces a harmonised insurance regulatory regime across the region. The program is one of the first insurance regulations in the world to follow the Basel Accord approach, with a 3-pillar structure that covers capital requirements, risk management and disclosure requirements. In Australia, the Life and General Insurance Capital (LAGIC) regime, which governs life and general insurers, follows a similar approach. In common with Solvency II, LAGIC adopts a risk-based approach for insurers, aimed at tailoring insurers’ capital requirements to their actual risk exposure. This is because the insurance industry is widely considered to be of systemic importance to the financial sector of the economy. This study focuses on Pillar 1, which deals with the capital requirements of the insurance regulations.

Capital Markets CRC Limited,
Level 3, 55 Harrington Street, Sydney NSW 2000, Australia.
t. 61 (2) 8088 4200
email: admin@cmcrc.com