What Is the Australian Securities Exchange (ASX)?

The Australian Securities Exchange is headquartered in Sydney, Australia. The Exchange in its current form was created through the merger of the Australian Stock Exchange and Sydney Futures Exchange in 2006. The ASX acts as a market operator, clearing house, and payments facilitator. It also provides educational materials to retail investors.

Understanding the Australian Securities Exchange (ASX)

ASX is consistently ranked among the top exchanges globally. Other major exchanges include the Tokyo Stock Exchange or TSE, the New York Stock Exchange (NYSE), the Nasdaq, and the London Stock Exchange (LSE). Each exchange has specific listing requirements that include regular financial reports and minimum capital requirements. For example, in 2021, the NYSE has a key listing requirement that stipulated aggregate shareholders equity for last three fiscal years of greater than or equal to $10 million, a global market capitalization of $200 million, and a minimum share price of $4. In addition, for initial public offerings and secondary issuers must have 400 shareholders.

Australian Securities Exchange (ASX) and Electronic Trading

As with the majority of international exchanges, ASX’s relies on a hefty data center to help connect it to leading financial hubs and facilitate electronic trading. Electronic trading gained strong traction with NYSE’s 2005 acquisition of rival market the Archipelago Exchange—a fully electronic exchange that listed new and fast-growing companies. NYSE Arca was the new name following the acquisition. Cybersecurity is an increasing concern as exchanges become more interconnected via the internet.

ASX and Education

The Australian Securities Exchange has a strong emphasis on educating visitors to its website, the investing public, and current and potential listers. For example, for first-time investors, ASX offers free resources for understanding the public markets, exploring different asset classes, and developing a personal investment strategy. Visitors can download a series of tutorials and guidebooks. In addition, ASX offers a game-version of trading where players do not have to risk real money; instead, they can learn the basics in a risk-free environment.

What Is the Arms Index (TRIN)?

The Arms Index, also called the Short-Term Trading Index (TRIN) is a technical analysis indicator that compares the number of advancing and declining stocks (AD Ratio) to advancing and declining volume (AD volume). It is used to gauge overall market sentiment. Richard W. Arms, Jr. invented it in 1967, and it measures the relationship between market supply and demand. It serves as a predictor of future price movements in the market, primarily on an intraday basis. It does this by generating overbought and oversold levels, which indicate when the index (and the majority of stocks in it) will change direction.

The Formula for Arms Index (TRIN) is:


$\begin{aligned} &\text{TRIN}\ =\ \frac{\text{Advancing Stocks/Declining Stocks}}{\text{Advancing Volume/Declining Volume}}\\ &\textbf{where:}\\ & \begin{aligned} \text{Advancing Stocks}\ =\ &\text{Number of stocks that are higher}\\ &\text{on the day}\end{aligned}\\ &\begin{aligned} \text{Declining Stocks}\ =\ &\text{Number of stocks that are lower}\\ &\text{on the day}\end{aligned}\\ &\begin{aligned} \text{Advancing Volume}\ =\ &\text{Total volume of all advancing}\\ &\text{stocks}\end{aligned}\\ &\begin{aligned}\text{Declining Volume}\ =\ &\text{Total volume of all declining}\\ &\text{stocks}\end{aligned} \end{aligned}$​TRIN = Advancing Volume/Declining VolumeAdvancing Stocks/Declining Stocks​where:Advancing Stocks = ​Number of stocks that are higher​Declining Stocks = ​Number of stocks that are lower​Advancing Volume = ​Total volume of all advancing​​

How to Calculate the Arms Index (TRIN)

TRIN is provided in many charting applications. To calculate by hand, use the following steps.

1. At set intervals, such as every five minutes or daily (or whatever interval is chosen), find the AD Ratio by dividing the number of advancing stocks by the number of declining stocks.
2. Divide total advancing volume by total declining volume to get AD Volume.
3. Divide the AD Ratio by AD Volume.
4. Record the result and plot on a graph.
5. Repeat the calculation at the next chosen time interval.
6. Connect multiple data points to form a graph and see how the TRIN moves over time.

What Does the Arms Index (TRIN) Tell You?

The Arms index seeks to provide a more dynamic explanation of overall movements in the composite value of stock exchanges, such as the NYSE or NASDAQ, by analyzing the strength and breadth of these movements.

An index value of 1.0 indicates that the ratio of AD Volume is equal to the AD Ratio. The market is said to be in a neutral state when the index equals 1.0, since the up volume is evenly distributed over the advancing issues and the down volume is evenly distributed over the declining issues.

Many analysts believe that the Arms Index provides a bullish signal when it’s less than 1.0, since there’s greater volume in the average up stock than the average down stock. In fact, some analysts have found that the long-term equilibrium for the index is below 1.0, potentially confirming that there is a bullish bias to the stock market.

On the other hand, a reading of greater than 1.0 is typically seen as a bearish signal, since there’s greater volume in the average down stock than the average up stock.

The farther away from 1.00 the Arms Index value is, the greater the contrast between buying and selling on that day. A value that exceeds 3.00 indicates an oversold market and that bearish sentiment is too dramatic. This could mean an upward reversal in prices/index is coming.

Conversely, a TRIN value that dips below 0.50 may indicate an overbought market and that bullish sentiment is overheating.

Traders look not only at the value of the indicator but also at how it changes throughout the day. They look for extremes in the index value for signs that the market may soon change directions.

The Difference Between the Arms Index (TRIN) and the Tick Index (TICK)

TRIN compares the number of advancing and declining stocks to the volume in both advancing and declining stocks. The Tick index compares the number of stocks making an uptick to the number of stocks making a downtick. The Tick Index is used to gauge intraday sentiment. The Tick Index does not factor volume, but extreme readings still signal potentially overbought or oversold conditions.

Limitations of Using the Arms Index (TRIN)

The Arms Index has a few mathematical peculiarities that traders and investors should be aware of when using it. Since the index emphasizes volume, inaccuracies arise when there isn’t as much advancing volume in advancing issues as expected. This may not be a typical situation, but it’s a situation that can arise and could potentially make the indicator unreliable.

Here are two examples of instances where problems may occur:

• Suppose that a very bullish day occurs where there are twice as many advancing issues as declining issues and twice as much advancing volume as declining volume. Despite the very bullish trading, the Arms Index would yield only a neutral value of (2/1)/(2/1) = 1.0, suggesting that the index’s reading may not be entirely accurate.
• Suppose that another bullish scenario occurs where there are three times as many advancing issues as declining issues and twice as much advancing volume than declining volume. In this case, the Arms Index would actually yield a bearish (3/1)/(2/1) = 1.5 reading, again suggesting an inaccuracy.

One way to solve this problem would be to separate the two components of the indicator into issues and volume instead of using them in the same equation. For instance, advancing issues divided by declining issues could show one trend, while advancing volume over declining volume could show a separate trend. These ratios are called the advance/decline ratio and upside/downside ratio, respectively. Both of these could be compared to tell the market’s true story.

What Is an Asset Swap?

An asset swap is similar in structure to a plain vanilla swap with the key difference being the underlying of the swap contract. Rather than regular fixed and floating loan interest rates being swapped, fixed and floating assets are being exchanged.

All swaps are derivative contracts through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount agreed upon by both parties. As the name suggests, asset swaps involve an actual asset exchange instead of just cash flows.

Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter (OTC) contracts between businesses or financial institutions.

Understanding an Asset Swap

Asset swaps can be used to overlay the fixed interest rates of bond coupons with floating rates. In that sense, they are used to transform cash flow characteristics of underlying assets and transforming them to hedge the asset’s risks, whether related to currency, credit, and/or interest rates.

Typically, an asset swap involves transactions in which the investor acquires a bond position and then enters into an interest rate swap with the bank that sold them the bond. The investor pays fixed and receives floating. This transforms the fixed coupon of the bond into a LIBOR-based floating coupon.

It is widely used by banks to convert their long-term fixed rate assets to a floating rate in order to match their short-term liabilities (depositor accounts).

Another use is to insure against loss due to credit risk, such as default or bankruptcy, of the bond’s issuer. Here, the swap buyer is also buying protection.

The Process of an Asset Swap 

Whether the swap is to hedge interest rate risk or default risk, there are two separate trades that occur.

First, the swap buyer purchases a bond from the swap seller in return for a full price of par plus accrued interest (called the dirty price).

Next, the two parties create a contract where the buyer agrees to pay fixed coupons to the swap seller equal to the fixed rate coupons received from the bond. In return, the swap buyer receives variable rate payments of LIBOR plus (or minus) an agreed-upon fixed spread. The maturity of this swap is the same as the maturity of the asset.

The mechanics are the same for the swap buyer wishing to hedge default or some other event risk. Here, the swap buyer is essentially buying protection and the swap seller is also selling that protection.

As before, the swap seller (protection seller) will agree to pay the swap buyer (protection buyer) LIBOR plus (or minus) a spread in return for the cash flows of the risky bond (the bond itself does not change hands). In the event of default, the swap buyer will continue to receive LIBOR plus (or minus) the spread from the swap seller. In this way, the swap buyer has transformed its original risk profile by changing both its interest rate and credit risk exposure.

How Is the Spread of an Asset Swap Calculated?

There are two components used in calculating the spread for an asset swap. The first one is the value of coupons of underlying assets minus par swap rates. The second component is a comparison between bond prices and par values to determine the price that the investor has to pay over the lifetime of the swap. The difference between these two components is the asset swap spread paid by the protection seller to the swap buyer.

Example of an Asset Swap

Suppose an investor buys a bond at a dirty price of 110% and wants to hedge the risk of a default by the bond issuer. She contacts a bank for an asset swap. The bond’s fixed coupons are 6% of par value. The swap rate is 5%. Assume that the investor has to pay 0.5% price premium during the swap’s lifetime. Then the asset swap spread is 0.5% (6 – 5 – 0.5). Hence the bank pays the investor LIBOR rates plus 0.5% during the swap’s lifetime.

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