Canada Warms to Derivatives

Terry Flanagan

The Canadian derivatives market is heating up as institutional and retail traders embrace electronic trading platforms for currencies and other commodities.

“We are seeing solid growth in Canada for FX trading,” said Trevor Young, vice-president of product management at OANDA Corp., an online FX broker. “The principal reason that people are attracted to FX trading is that the market is huge, it’s a 24-hour market, so you can trade in any region at any time of day.”

OANDA has made multiple instruments available on its trading platform for Canadian customers, including U.S. government debt securities, commodities and international stock indices.

OANDA Canada clients invest in a variety of commodity, stock index and fixed income contracts for differences (CFDs) using the company’s trading platform. A CFD is a derivative instrument whose price is based on an underlying asset.

Neither the trader nor the authorized, regulated dealer owns the underlying financial asset; they only own the speculation contract. CFDs may include equities, commodities, indices or currencies, and investors can trade them without the need to tie up a large amount of capital to do so.

CFDs are traded primarily in Europe, and increasingly Canada. They are not permitted to be traded in the U.S., however, which underscores some of the differences that are emerging in regulatory regimes being adopted in different jurisdictions.

“Given the regulatory push to move to exchanges, we will possibly see lower liquidity in these markets and the value of liquidity cannot be overstated,” said Terri Duhon, managing partner at B&B Structured Finance, a consultant, in a blog posting.

“The one counter is that moving to exchanges may encourage more market participants to trade those derivatives previously only available OTC,” Duhon said. “With all the uncertainty surrounding this effort, it is impossible to know what the future of the liquidity landscape will look like. What we do know is that the law of unintended consequences hangs heavily over this space.”

OANDA has extended its MetaTrader 4 (MT4) platform to support mobile applications for iPhone and Android smartphones and tablets.

MT4 is a massive code library and developer API (application programming interface) that allows users to program trading instructions set to execute automatically, with no human intervention. Variables in the MT4 algorithms (branded ‘Expert Advisors’) may include timing, price, or quantity of the order.

“When we first got into FX it was a bit of a disruptive play, as the ability to trade retail FX wasn’t available,” said Young at OANDA. “We are a technology company by nature; we are dedicated to providing an innovative FX platform that supports online, mobile, and API.”

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