ASX ordered to take a good look in the mirror

Broking firms have also been told off by ASIC for solely relying on ASX and not having alternatives like Chi-X available for their clients.

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The investments regulator has kept the heat on ASX Ltd (ASX: ASX) for its 16 November systems crash, ordering it to conduct an independent review.

Australian Securities and Investments Commission (ASIC) continues to assess whether ASX is fit to hold its share market licence

In a sign that this assessment is not casting the best light on the company, ASIC and the Reserve Bank of Australia have notified ASX that it should perform an independent review within the next 6 months.

The concern for ASX holding the market licence is whether it "has sufficient financial, technological and human resources to operate its markets".

Critics have pointed to the virtual monopoly the company enjoys, citing that it provides no incentive for it to invest sufficiently in infrastructure.

OpenMarkets chief executive Ivan Tchourilov said in October after an ASX website crash that its dominance was unhealthy.

"The industry is concerned that ASX has too much power to dictate play and there isn't much of an opportunity for competitors to create a diverse environment that will ultimately benefit customers."

ASX Ltd confirmed to The Motley Fool that it will complete an independent report. 

"We are focused on operating a safe and reliable market, and restoring confidence," said an ASX spokesperson.

Broking firms told off for not having a backup to ASX

ASIC also took aim at broking firms for not having a backup to ASX available for their clients.

The sole reliance on the ASX only consolidates the monopoly. The regulator is also concerned that not having a backup fails brokers' "best execution" obligations to clients.

Chi-X is an alternative market in Australia where trades for a subset of ASX-listed shares can be executed.

ASIC is alarmed at how it didn't experience an increase in volume on 16 November when the ASX was down for most of the day.

"Participants' duties to their clients, including the obligation to take reasonable steps to obtain best execution, do not fall away where there has been a market outage or disruption," said ASIC commissioner Cathie Armour.

"The behaviour of market participants during this outage indicated too many firms are reliant on the ASX to trade listed securities. With a fully functioning alternative venue available, we are examining why far more trading did not occur on Chi-X on the day of the outage."

In the coming year, the regulator will review what business continuity arrangements market participants (ie brokers) have in place.

Some broking platforms, like CommSec, already have Chi-X available as an alternative place of trade execution. Such providers were able to continue to provide a partial service to their clients on 16 November.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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