Canadian Equity Markets Undergo Rapid Change

Terry Flanagan

Equity markets in Canada are seeing fast-moving developments with the launch of a new alternative trading system by Chi-X Canada, completion of the Maple-TMX deal and major regulatory changes aimed at market structure looming just ahead.

Chi-X Canada plans to launch a second lit marketplace, CX2 ATS, in the first quarter of 2013. With CX2, Chi-X Canada will establish a unique and different market model and further provide the trading community with greater choice and functionality, according to the company, which is controlled by global exchange operator Chi-X Global.

“CX2 will be looking to lower execution costs and enable Chi-X’s customers to internalize their order flow,” Dan Kessous, chief executive of Chi-X Canada, told Markets Media.

“CX2 will complement Chi-X to provide an even stronger alternative to the TMX Group, which now operates four markets,” Kessous added.

CX2 aims to target under-serviced areas of the market such as institutional and retail investors.

“CX2 will be offering broker preferencing and full broker attribution,” said Kessous. “Based on Chi-X technology, it will leverage existing infrastructure to enable Chi-X customers to access CX2 seamlessly.”

With the recently completed acquisition of TMX Group—which operates the Toronto Stock Exchange, Canada’s largest bourse—by Maple Group, a consortium of Canadian banks and pension funds, Chi-X Canada faces formidable odds.

“At one level, this [TMX] looks like market participants getting behind its primary venue, which doesn’t necessarily augur well for Chi-X,” said Steve Grob, director of strategy at Fidessa Group, a trading and technology firm. “On the other hand, Chi-X supports other, faster market participants with different business models. Chi-X also has a proven track record of innovation and is working on CX2.”

Coming a little more than a year after the planned takeover of TMX by London Stock Exchange (LSE) Group failed to win regulatory approval, the Maple acquisition represents something of a vertically-integrated approach, linking up the exchange with its primary customers.

One of the claimed advantages of the LSE’s proposed merger with TMX was that it would have given the new entity a platform to drive further international transactions.

“At face value, the Maple deal looks a little less promising in this regard, as it is refocusing control of TMX back with the major domestic institutions that use it,” said Grob. “Also it’s not clear if the financial basis of the transaction will leave it sufficient financial firepower to drive international deals. On the other hand, exchanges have found it difficult to navigate the regulatory hurdles associated with such international tie-ups so maybe this doesn’t matter in the short term.”

The acquisition will refocus power back with the large Canadian institutions, “and so TMX will have to reassure them that trading fees won’t go up unnecessarily”, Grob said. “TMX will be free to maintain and develop new trading books or venues (such as Alpha) to meet the threat of alternative domestic competition,” he added. “It will also be interesting to see how the new entity meets competition for trading from U.S. venues, as right now nearly 30% of the TSX 60 [a stock market index of 60 large companies listed on the Toronto Stock Exchange] trades south of the border.”

Canadian regulators, meanwhile, will be implementing new rules that will affect market structure, including the Dark Rules and the elimination of the Short Sale Rule, which will both come into force in mid-October, and the Electronic Trading Rule, which is set to be introduced in March next year.

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