09.29.2011
By Terry Flanagan

Alpha Exchange Approval Imminent?

Canadian ATS moves forward in bid to win exchange status.

companies appear likely to have by year-end a new and collaborative exchange on which to list their securities and otherwise seek capital, as Alpha Trading Systems irons out remaining issues and prepares to replace its alternative trading system (ATS) with an exchange.

“We’ve made tremendous progress, and my hope is we’ll get there this fall,” said Jos Schmitt, CEO of Alpha Group, adding the firm is in the process of ironing out issues raised subsequent to the publication for comments of its exchange application.

Alpha has worked over one year with its primary regulator, the Ontario Securities Commission, to prepare its application, before it was formally published for comments in April this year. Schmitt says he is not aware of any major issues which can’t be addressed and closed in the near future, and the firm hopes to have the application “rapidly put forward to the commission” for a decision.

Schmitt said that Alpha has been developing the technological and operational infrastructure to support the exchange alongside the application process, so the exchange is able to accept listings soon after approval. That will bring Canada’s total number of stock exchanges to three, including the longstanding Toronto Stock Exchange and CNSX Markets, a relative upstart that was founded in 2001.

One of the issues Alpha is currently dealing with concerns its approach to market making, which the company refined after its “full file” was published for comments in April. In fact, market making is one element of the forthcoming exchange that is anticipated to set it apart from competitors.

Schmitt said the company is developing an approach that works as more of a partnership between the exchange, the issuers and the market makers, since all three parties are vital to a successful listing. “We believe the issuer has to play a key role in identifying and determining who the right market maker is [for the company],” Schmitt says, adding that occurs today at existing exchanges, but Alpha wants to make that process fully transparent.

In addition, rather than the exchange stepping back so a market maker derives its benefits solely from limited exchange provided fee advantages, Alpha wants the exchange to play a more active role in inducing markets makers to provide liquidity. So when the market maker’s trading results in strong liquidity and execution volume, which benefit the exchange, “We want to directly share a part of our own revenue in that security with the market maker, so it is far more incentivized to provide that liquidity,” Schmitt said, “And that is what is key for the issuer, which wants a very liquid market.”

Schmitt said Alpha wants to spread that partnership notion across the entire exchange model, which Alpha intends to extend to companies long before they consider a listing.

“An exchange has to be more than a simple recipient of listings. It needs to accompany entrepreneurs and companies across their entire lifecycle, help them in their development and growth process to maximize their probability of success. This is what we intent to do at Alpha,” Schmitt said.

Schmitt said Canada is losing a lot of potentially successful businesses because smaller companies today tend either to list too early, taking on the burdens of a public company before building out their businesses sufficiently, or they cross the border to the U.S. where there’s a wider selection of capital sources. Alpha plans to provide an approach to curb this trend, although Schmitt declined to detail it at this point.

Nevertheless, facilitating companies early funding needs and listing their stocks is Alpha’s primary reason to seek exchange status. BATS Global Markets and Direct Edge became exchanges in the U.S. within the last few years primarily to cut costs and gain access to tape revenues and the ability to clear directly through central depositories. Only recently has BATS applied to accept listings on its exchange.

“The reason we’re becoming an exchange is really to step into the listing space,” Schmitt said.

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