Changes Afoot in Canada

Terry Flanagan

Operators of Canadian trading venues are refocusing their role on improving the capital formation process amid a general slowdown in equities volumes.

“The big issue today is that the investment industry is going through a drought,” said Robert Young, CEO of Liquidnet Canada. “The principal driver is that stocks that make up the bulk of Canadian equities, such as commodities, energy and raw material, are in names that are currently out of favor.”

CNSX Markets, which has branded itself as “The Exchange for Entrepreneurs,” is providing listed companies with their own micro-site devoted to its background and plans, trading information, fundamental data, news releases and regulatory filings.

“It’s clear that what we, as an exchange, do best is assist entrepreneurs in raising the capital they need to grow their businesses,” said CNSX chief executive Richard Carleton.

Richard Carleton, CNSX Markets

Richard Carleton, CNSX Markets

CNSX’s value proposition is that with a listing model built for the information age, the regulatory burden on entrepreneurs can be reduced.

“We are providing more opportunities for our issuers to engage with potential investors, and, in partnership with the dealer community, deliver new trading services designed to tighten spreads and increase the depth of order books,” Carleton said.

As part of its new branding strategy, CNSX plans to combine its two order books, CNSX and Pure ATS.

“It has become clear that running two order books is duplicative,” said Carleton. “We are going to consolidate our trading platforms onto a single book, meaning one instance of a trading system, one point of access to all Canadian symbols, and one data feed.”

Liquidnet Canada in 2012 opened up its trading venue to registered broker-dealers, in an effort to offer more liquidity for its core institutional customers.

“In a world where the sell-side no longer wields the power it once did, Liquidnet is addressing the imbalance of information so the buy side can achieve better execution at better prices,” Young said. “In the past, buy-side institutions had to give an order to a broker and in that order was information. By delivering liquidity directly to the buy side, Liquidnet brought about a complete reversal of the information flow.”

Some public exchanges are creating their own dark pools to allow their clients the benefits of anonymity and non-display of orders while offering an exchange infrastructure.

Aequitas, the proposed exchange that’s backed by RBC and several other prominent companies, is founded on the premise that differentiated marketplace competition will enhance confidence in Canada’s capital markets.

Aequitas employs trading models that restrict predatory trading strategies while challenging the maker‐taker fee model, by providing liquidity through committed and sustainable market making.

The compensation that Aequitas proposes for market makers is matching priorities for its assigned securities in Aequitas’ dark and hybrid books, where they will not be exposed to predatory flows.

“Aequitas is talking about a new liquidity provision model,” said Young. “Exchanges have gone willy-nilly to the maker taker model in order to attract liquidity from high-frequency traders. However, a reliance on market makers alone is no panacea for predatory trading.”

The Aequitas proposal, comments for which are due by September 27, encapsulates the core issues around the Canadian marketplace, including multiple markets and the attendant fragmentation, maker taker fees, and high-frequency trading. It’s also rekindled debate about the major regulatory initiatives that have transformed the markets, such as the order protection rule, dark pool rules and marketplace rules.

In Canada, in addition to the best execution obligations, marketplaces are subject to a trade-through obligation, known as the order protection rule, which applies to the full depth of book, as opposed to the top-of-book requirement in the U.S.

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