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Price Discovery

Price Discovery in Australia

iShares ETFs are cross-listed exchange traded funds that are domiciled in the US. Since the time of the previous closing price in the US (in US$) the prior trading day, there are several real-time influences affecting the next A$ opening price level in Australia. Multiple Market Makers are involved in understanding these price drivers and calculating price levels for the iShares at the open and then throughout market trading hours in Australia.

The ASX has contracted two Market Makers to ensure liquidity by continuously announcing the levels at which they are available to buy and sell iShares ETFs real-time. In addition there is a range of other professionals who closely monitor the iShares in both the US and Australian time zones. There are three principal aspects that these Market Makers will take into consideration when pricing iShares:
a. the value of all the underlying securities that make up each individual iShares fund
b. the FX conversion rate of any underlying foreign currencies into A$
c. changes in sentiment since the previous US closing levels.

These professionals have real-time insight and can update trading orders on an intra-second basis. Accordingly they may trade against each other in a competitive manner. It is this 'dynamic' of market competition between professional buyers and sellers which ensures efficiency in price formation and investor protection. This means that the ASX screen price will continuously converge with the current perceived value for each of the iShares in A$ throughout market trading hours in Australia.

It is important to note that since iShares ETFs are not hedged for currency risk, they reflect both the movement in the foreign exchange rate of currency conversion as well as changes in the price level of the underlying asset.

Since the time of the closing price in the US, there are several real-time influences affecting the local A$ opening price level:
a. A$ currency movement
b. Changes in market sentiment
c. Changes in market prices of constituents or index alternatives

See the price variation line in the diagram below for an illustration of price discovery.

Price Discovery Illustration

 



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