Canadian Dark Pools Adapt to Market Change

Terry Flanagan

Canadian dark trading venues have adapted their pricing models to reflect the new realities created by price improvement rules.

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.

MatchNow has seen its market share climb in the 18 months since the new dark rules went into effect.
“We were at 2.5% last fall and are about 3.5% market share of all Canadian TSX-listed trading,” said Torstein Braaten, CEO of TriAct MatchNow.

Braaten attributes much of the increase to the introduction of trading ETFs at the quote, or “at the touch” ((buys at the National Best Offer and sells at the National Best Bid).

“The ETF at the quote is different from other dark trading, because the taker and the provider have to be a minimum of 5,000 for us. Most dark pools allow you to trade passively a 100-5,000 share order. We thought it was appropriate to provide price improvement for 5,000 and less.”

TriAct MatchNow requires that in order to trade at the quote, the counterparty has to at least put in a greater than 5,000 share passive order. “So what we’re seeing is multiple liquidity providers coming in with multiple size orders, so the bigger trades are all getting done,” said Braaten.

Canadian regulators have managed to stay ahead of the curve on many of the changes sweeping equities markets, such as dark pools and high frequency trading.

“There is a continued pace setting on market structure on the equities side. We continue to say to U.S. and European regulators, and market participants worldwide, that Canadian regulators have gotten it right,” said Robert Young, head of Liquidnet Canada. “I’m referring primarily to the dark rules that came out 18 months ago in Canada, but also to the IIROC HOT study.”

Regulators are also considering changes to the Order Protection Rule, which is akin to Regulation NMS in the United States.

“They have not disclosed what they’re going to do, but they are asking people, under confidentiality, their thoughts on changing the OPR,” Braaten said. “The rumor is they’re looking at if there should be a threshold for a market to have its orders protected.”

The concern, according to Braaten, is that the smaller markets, because they display an order, at some point could be top of book and therefore be protected, meaning a broker would be required to pay for market data from that venue.

“These small markets could have almost no trading, but because they display orders, they could extract as much as they want out of the market data,” Braaten said. “If it’s not a protected market, brokers won’t have to buy the market data, and the market will have to provide value that attracts order flow.”

Feature image via Dollar Photo Club

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