Canada Eyes Market Structure Changes

Terry Flanagan

Markets in Canada have experienced significant change and innovation in their structures over the past five years, largely due to advancements in technology and increased competition.

TMX Group has launched connectivity to its new high performance trading engine, TMX Quantum XA, in a test environment with simulated order entry sessions in preparation for the migration of Toronto Stock Exchange symbols, planned for June 2014.

“Our technology team is very excited to begin testing TMX Quantum XA with our Toronto Stock Exchange customers as we move closer to full migration across our remaining equity markets,” said Brenda Hoffman, chief information officer and group head of technology at TMX Group. “The TMX Quantum XA platform represents a step change in performance and efficiency in Canadian capital markets and sets a new cutting-edge standard for exchange technology.”

Brenda Hoffman, TMX

Brenda Hoffman, TMX

Canadian regulators have identified continued rapid evolution of market structures and trading strategies as a potential source of risk.

In its statement of priorities, the Ontario Securities Commission said that it will examine the evolution of the Canadian capital market structure and the impact of the order protection rule, algorithmic and other electronic trading, and market data fees.

“The regulators are looking at market data fees and the order protection rule, which forces them to go to every single lit market, no matter what size they are,” said Torstein Braaten, chief executive of TriAct Canada, a dark pool that currently has a 3.8% market share. “We expect them to come out with rules and recommendations within six months.”

Under rules that went into effect in Canada on October 15, 2012, operators of alternative trading systems (ATSs) must provide “meaningful price improvement”, meaning that in order to trade with a dark order, smaller orders must receive a minimum level of price improvement, defined as one trading increment or half a trading increment for securities with a bid-ask spread of one trading increment.

When TriAct made the decision to make all matches execute at the mid-point after the October 15, 2012 dark rule changes, a number of TriAct subscribers suggested that they would no longer enter liquidity providing orders for stocks with wide spreads since mid-point would result more price improvement than they were willing to give.

It decided to offer a new price improvement tier that provided a meaningful amount of price improvement in wider spread stocks. It also allowed for large ETF orders to trade at the quote (buys at the National Best Offer and sells at the National Best Bid).

“MatchNow went through a year and a half revival since the new dark rules that require significant price improvement on small dark orders,” said Braaten. “We had market share numbers of 3-3.5% in 2012. After the dark rule changes, we dipped down to 2%, but this month we’re back up to 3.8% month to date market share on TSX listed securities. We’ve been able to prove that you can have dark pools with that new rule that they can be successful.”

Most Canadian marketplaces are now operating multiple books to cater to different audiences. TSX has three books: primary exchange, TMX Select and Alpha. Chi-X has a primary book and CX2, which is inverse taker/maker, so the rebates are paid to the person who takes liquidity.

“The trend in Canada is to have a marketplace with two or three books, with different pricing models, so they’re all trying to compete on fees, but most of these multiple books have not garnered a lot of market share, they just created a fair amount of frustration,” Braaten said. “Even if the second book has a good business model, they’re not making it easier for the broker with all the connectivity and market data costs. It’s difficult to see how this makes sense.”

Featured image via iStock

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