Public and private capital markets play different but complementary roles in financing Australian companies. How markets are structured affects how companies raise funds, how investors access opportunities and how prices are discovered. Technology, regulation and the growth of superannuation are reshaping the balance between public and private markets, with important implications for how capital is allocated, according to University of Melbourne Professor of Finance, Carole Comerton-Forde, who has studied market structures for 25 years.

UNSW Business School’s Senior Deputy Dean Research & Enterprise, Professor Karin Sanders and Professor of Finance, Alexandre Jeanneret, recently spoke with Prof. Comerton-Forde about public and private markets, tokenisation, superannuation funds, tax settings and advice for researchers who wanted their work to inform policy.

Why the interest in market structure?

Prof. Sanders: What drew you to market structure, and what keeps you interested?

Prof. Comerton-Forde: In grade three I said I wanted to be an economist, and I remember a school talk that started with bears, stags and bulls. My interest became serious during honours at the University of Sydney, where the department had recently gained access to the transaction history of every order and trade on the Australian Stock Exchange. I did not know it at the time, but that gave Australian researchers an advantage in market-structure research.

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My honours thesis examined how investment banks could provide liquidity to customers using their own balance sheets and the value this provided to markets. That work led to 25 years of study. Market structure covers how market mechanisms work, how they influence people's behaviour and participation, how liquidity is determined, and how prices are discovered. It has sustained my interest throughout.

Prof. Sanders: Which research finding surprised you most, and how did it change the way we think about financial markets?

Prof. Comerton-Forde: No single finding stood out. What surprised me most was how much academic finance assumes away the frictions and mechanics I study. The mainstream literature says to assume they are given and move on.

In real markets, the details are important. Is the market transparent? What is the minimum variation in price? How fast are markets, and how does that affect the way people participate? People in the market spend a huge amount of time on these questions, yet much of the academic literature ignores them. That is where market structure researchers can add value. We can bring rigour to market design questions, which helps make markets more efficient and reduces trading costs.

Prof. Sanders: Are you more interested in individual investors or in institutions, and why?

Prof. Comerton-Forde: Most of my research focused on institutional investors. In recent years, I have also thought about how retail investors participate and about exchange-traded funds, which in Australia are largely retail products.

"Markets need to be efficient for institutions because they can trade at scale and offer better outcomes for their individual members"

CAROLE COMERTON-FORDE

People often miss that institutions represent individuals. AustralianSuper and UniSuper manage hundreds of billions of dollars on our behalf. We need to think about all participants and design a market that works for everyone. Markets need to be efficient for institutions because they can trade at scale and offer better outcomes for their individual members.

The next decade

Prof. Sanders: What changes do you expect in financial markets over the next ten years?

Prof. Comerton-Forde: Markets constantly evolve, which is one reason I studied essentially the same questions for 25 years. Most of the change comes from technology, from regulation, or from their interaction, and I expect that to continue. The change I focused on was the continuum between public and private markets. I think it needs to change, and it will.

Public markets offer transparency, liquidity, continuous trading and price discovery, but they require more disclosure and regulation. There has been talk in Australia and around the world that the burden and cost of that regulation and disclosure may be too high. Private markets are lightly regulated, with almost no disclosure, which gives companies flexibility. They have no liquidity, getting liquidity is hard and costly, and they have no useful price discovery. I think some of those boundaries will start to blur. I would like private markets to adopt useful features of public markets, such as better price discovery, greater liquidity, and greater transparency, without the high regulatory burden.

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Public markets work for large listed companies such as Commonwealth Bank and BHP, as well as for Google and Amazon in the United States. About 2000 companies are listed on the Australian Securities Exchange (ASX). I do not think the market serves company number 500 well, and definitely not company number 1900. How do we provide an ecosystem in which small and growing companies can get access to capital without the costs of trading in a public market?

Technology will play an important role in how markets evolve, but it is a means to an end. Australia used to lead in market infrastructure. We were the first exchange in the world to dematerialise assets, so a stock certificate was unnecessary and a digital register held the record. We have fallen well behind. We trade on a T+2 basis, which means a trade takes two days to settle. The United States is at T+1, and much of the rest of the world is moving to T+1 as well. We need to move to faster settlement. Tokenisation may play a role, but that is not the only path forward.

In private markets, tokenisation could facilitate more efficient ownership transfers and new opportunities for secondary trading. But the broader objective is to improve liquidity, transparency and price discovery. These improvements can be achieved through a range of market designs and technologies.

Prof. Sanders: What role do you think AI will play in these changes?

Prof. Comerton-Forde: AI can be used in all facets of markets. It can help us make better decisions, and potentially ensure information is analysed and processed more quickly. It can help find new solutions. I do not think it is the solution in itself. It is a tool that can help progress the various aspects of market design and market infrastructure.

"Superannuation funds play an important role in Australia and account for about 23% of ownership of ASX-listed companies"

CAROLE COMERTON-FORDE

How Australia compares

Prof. Jeanneret: How does the Australian market structure compare with other developed markets?

Prof. Comerton-Forde: Equity market structure has become fairly homogenised. Every equity market in the world has electronic limit order books where orders interact, and high-frequency trading and technology play important roles. On infrastructure, we are not particularly different.

The level of competition is different. Australia has two stock exchanges: the ASX, and a second exchange that until very recently belonged to Cboe. TMX, the owner of the Toronto exchange, has bought it. The United States has 18 stock exchanges, around 50 dark pools and 200 market makers, which brings a huge amount of complexity that we do not have here. In Australia, it is important that we have a competitive landscape. The sale to TMX mattered because TMX now wants to invest in and build the Australian market. Just before the sale process started, what is now TMX Australia applied for a licence to offer listing services. TMX will be able to list companies and trade companies listed on the ASX.

Institutional investors also differ. Superannuation funds play an important role in Australia and account for about 23% of ownership of ASX-listed companies. They are increasingly shifting assets to private markets and offshore, and that dynamic will play out in the public equity market too.

Where research makes a difference

Prof. Sanders: Where can academic research in your area make a societal impact?

Prof. Comerton-Forde: From the general finance literature, I will confine myself to one example: portfolio theory. It taught us that investors should care about the risk and return of the whole portfolio, not the risk of an individual security in isolation, because securities are imperfectly correlated and diversification can yield substantial benefits. The development of mutual funds and index funds followed, and Vanguard and Jack Bogle brought low-cost indexing to the market. You can now invest in a diversified global or Australian product for a few basis points, with a few hundred dollars. Essentially, everyone has the opportunity to invest and grow their wealth, which fuels economic growth and lets individuals build wealth. Finance has a bad name, but it has the potential to deliver significant benefits to the economy.

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In my own field, the work focuses on designing markets to be more efficient and less costly, so people can focus on generating returns rather than incurring costs. One area is dark trading versus lit trading: how much trading should be transparent? We want institutions to be able to trade without transparency, because that helps them manage costs. We also want enough transparency for price discovery to work well. Academic research provides insights into how the regulatory structure should be designed to account for that trade-off.

Another example is how to close the market. Closing auctions have become the standard mechanism in equity markets around the world. They concentrate liquidity at a single point in time and set the price at the end of the day, which matters for many things outside financial markets. That price needs to be fair, efficient, and work well for investors. Market structure research offers many insights into market design.

Tax, relevance and policy

Prof. Sanders: Markets are more global and interconnected. What policy changes will be important over the next decade?

Prof. Comerton-Forde: That depends on where you sit, and I answered for Australia. One of the biggest risks is that we become less globally relevant. We are a small economy and account for about 1.5 to 2% of global equity markets. Our market is very concentrated in mining and financial stocks, and we have little exposure to technology, which has been the growth engine of the global economy over the last five to ten years. How do Australians get exposure to that? More importantly, how do we ensure our economy invests in the right sectors to fuel future growth?

Productivity has been declining. Recent tax changes have made Australia a much less attractive place to invest, and tax policy encourages companies to pay dividends rather than reinvest in growth. US markets are also moving quickly towards extended trading hours, which means you will be able to trade US-listed stocks during our business hours. For a retail investor, it becomes attractive if you can trade and own Google and Amazon seamlessly and cheaply. Do we need to do more to ensure Australians want to invest in the local economy to secure our future growth?

"How do we make the Australian market more efficient and more attractive for Australian companies to list and remain here, rather than seek growth opportunities offshore?"

CAROLE COMERTON-FORDE

Regulation adds another layer. How do we ensure our market is competitive and attractive enough for companies to list here, stay here, and bring their growth opportunities to the Australian economy rather than the global economy?

Prof. Sanders: Imagine Prime Minister Anthony Albanese came to you for answers. What would you tell him?

Prof. Comerton-Forde: There are many answers, but given what has happened this year, my first would be to fix tax policy and reverse the increase in tax on growth assets. If we do not incentivise people to take risks and invest in Australian businesses, how can we improve productivity? These are fundamental issues. Housing is a separate matter: you have to solve the supply side, rather than what has been done through tax policy.

My focus is markets. How do we make the Australian market more efficient and more attractive for Australian companies to list and remain here, rather than seek growth opportunities offshore? Tax is a very important lever for that. Other countries provide tax incentives to encourage investment – Australia now imposes substantial tax penalties for risk-taking.

Career insights and lessons

Prof. Sanders: Which experiences have influenced you most as an academic?

Prof. Comerton-Forde: Two. Early in my career, I was fortunate to spend a sabbatical at the New York Stock Exchange as a visiting economist. The exchange had just gone public, technology was rapidly changing the market, and new regulation encouraged competition in equity trading. I interacted with market participants and learned how markets operate and how people deal with challenges. It was also my first real exposure to the US academic environment, which changed my mindset about rigour, attention to detail, and how to develop interesting questions and conduct rigorous research.

The second came a few years later. The Australian government decided to introduce competition in equities trading, and because of what I had learnt in the United States, I had expertise in that area. I worked with the Australian Securities and Investments Commission (ASIC), the securities regulator, to help develop the rules framework for competition. I saw firsthand how policy gets made. While you want to find the perfect solution, you must pragmatically accept the best solution given the constraints, competing interests and potential unintended consequences. ASIC has been an evidence-based regulator and has been open to what the academic literature has shown on market design. I have continued to work with ASIC for a decade and a half on market structure issues.

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Prof. Sanders: Early career researchers often struggle to balance academic work and societal impact. What advice would you offer them?

Prof. Comerton-Forde: Pay attention to what is going on in the real world. I am often surprised by how narrowly early-career academics focus on the existing literature. Understanding the literature is important for identifying interesting academic questions, but you also need to understand the problems facing business, investors, regulators and individuals. The best questions often sit at the intersection of the literature and the real world. I tell my students and the early-career academics I work with to spend time engaging with the real world: talk to regulators, practitioners, market participants, and policymakers, understand what worries them, and work out how research can address their problems.

The big advantage we have as academics is independence. We do not have a dog in the fight. We bring a fresh perspective without vested interests, and policymakers and government want to hear from people with an independent view.

Prof. Sanders: Are you saying people in banking and finance move too quickly to academic research and ignore what is going on in society?

Prof. Comerton-Forde: I think you need to do both. You need to be on top of the literature and in the weeds of it, and you need to pair that with what is happening in the real world. What are the real problems people need to solve, and how can you bring academic rigour to solving them?