A survey of more than 13,000 online investors and traders by researcher Investment Trends in May and June found “CHESS sponsorship” was listed as a top factor by about 35 per cent of respondents. It was beaten only by the brokerage or fees charged, ease of account opening and having an existing relationship with the provider, among 15 options.
The term refers to the ASX’s maintenance of a register of owners of a particular security. In Australia, investors who purchase ASX-listed shares or funds under their own individual holder identification number (HIN) are considered to have a “beneficial ownership” of those assets.
The system differs from the custodial model dominant in the US and elsewhere, in which the broker or platform technically owns the shares and gives customers an exposure, akin to buying units in a managed fund.
The CHESS model has become mired in controversy after its efforts to migrate the system to distributed ledger or “blockchain” technology was delayed and ultimately abandoned, at a cost of $250 million to the ASX’s balance sheet.
But Mr Nicolaides said the model – long-favoured by Australia’s self-directed investors – was being promoted in online forums and social media threads frequented by the next generation of investors.
Internal surveys of its own customers suggested it was among the “top five” reasons they joined the platform, he said. Many customers hope that CHESS sponsorship would protect their assets in the case that their broker or platform collapsed, unlike the estimated one million FTX customers who are now unsecured creditors (including about 30,000 Australians).
“It’s ironic that a system sometimes singled out as being a little bit archaic has actually enabled a huge amount of innovation, with new players like us and SelfWealth coming into the market,” Mr Nicolaides said.
Asked whether his business was affected by the bungled CHESS replacement project, the fintech founder said the model had benefits even without moving to new technology, which should reduce costs and speed up transactions.
“The current CHESS system, or whatever it evolves into one day, is the flagship for a centralised approach to financial assets,” he said. “Whilst we all like lower costs, it’s a key source of confidence that has allowed us to scale.”
Openmarkets chief executive Dan Jowett, which executes trades on behalf of Pearler customers, confirmed the platform had hit the milestone of $500 million under administration. “To see such robust volume growth in a year of shifting market conditions is a testament to both Pearler’s market-leading platform capabilities and commitment to innovation, as well as its increasing role in helping younger investors implement long-term approaches to wealth creation,” he said.
Rival platform SelfWealth, which is listed on the ASX and was launched in 2012, has also advocated for the benefits of CHESS sponsorship. In a post on its website, the broker warned customers of “custodian model” platforms that their “ownership of shares isn’t as clear” if their provider “goes under”.
SelfWealth increased its assets under administration by 26 per cent to $8.2 billion over the 2021-22 financial year, according to company filings. The number of active traders on its platform jumped 32 per cent to almost 126,000 over the period.
However, while the Investment Trends data showed CHESS sponsorship was a significant factor in platform choice, it also found demand was more heightened among older investors. Thirty-eight per cent of 18 to 24-year-old respondents said they were “comfortable” or “very comfortable” forgoing CHESS sponsorship in exchange for zero brokerage fees, compared to 26 per cent of investors aged 65-plus.
When it launched in 2020, Superhero, a leading proponent of the custodial model, said its single HIN for all customers allowed it to keep trading costs low and also digitise the manual processes of the “old-school” brokers.
In September last year, rival broker Stake undercut the market with an offer of $3 brokerage for CHESS-sponsored trading.