Parsing Cross-Border Trading

Terry Flanagan

Canadian investors can trade U.S. stocks just like U.S. investors, but when it comes to trading domestic stocks, they must deal with the unique intricacies of the Canadian trading system, according to Nick Thadaney, CEO of ITG Canada.

“The big issues that a lot of clients are grappling with are around the rapidly changing landscape” pertaining to market structure and regulation, Thadaney told Markets Media. “One of the more relevant issues to investors of Canadian securities is the notion that most of the largest Canadian securities are not only listed in Canada but also listed in the U.S.”

Canadians need to navigate both sides of the border, and in doing so “there is a very tight requirement for a razor-sharp expertise in foreign exchange,” Thadaney said. “Naturally if you’ve got a stock that is trading both on a Canadian market place as well as the U.S. market place at the same time, to really get a true understanding of the real time value of that particular security you need to be very cognizant of where the real-time FX is.”

Canadian brokers can clear and settle Canadian securities on both sides of the border, just as they can U.S. securities. “I can trade U.S. securities from Canada,” said Thadaney. “It just adds a very different dynamic to the way Canadians look at markets. Every trader in Canada trades in both Canadian and U.S. markets pretty much as they were the same market place.”

One major difference is the level of transparency in Canada is higher than in the U.S., because brokers are identified by numerals. “If you are a trader at a sell-side firm, your broker number is attached to that trade and it pops up right away, so you can see which broker was attached to a particular transaction,” Thadaney said. “You don’t have that level of visibility in the States, much less other countries. That is a structural difference.”

Market structure issues dominate the discussion of Canadian equity markets, particularly maker-taker pricing, which has displaced broker preferencing, a form of internalization, as the #1 issue.

“Maker-taker pricing is a far bigger topic today than broker preferencing.” Thadaney said. “People are pretty much lined up against maker-taker because the behavior of maker-takers appears to simulate activities that can sometimes be quite useless to the market.”

Regulators are looking at changing the order protection rule, but Thadaney thinks they should just get rid of it. “On the order protection rule, regulators were trying to incent a better market place,” he said. “They should scrap the order protection rule, altogether. No one should really be required to connect to anywhere, but instead they should be required to be transparent about their activities.”

Privately, some regulators have indicated that the order protection rule should go. “I’ve spoken to a number of regulators, and quietly a lot of them will admit that the order protection rule had a lot of hair on it and should be eliminated,” said Thadaney.

ITG Canada is one of the founding partners of Aequitas Innovations, which is proposing an exchange model that seeks to curb high-frequency trading. “When you think of the ownership group of Aequitas, it’s not a bunch of brokers,” Thadaney said. “It’s three brokers and a bunch of asset managers, which is not typically the case when you look at how markets organize themselves.”

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