02.17.2016
By Terry Flanagan

Costs Come to Fore in Canada

This entry is part 6 in the series Topics in Trading

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Technological advances, market fragmentation, and the proliferation of ‘Big Data’ have given institutional traders more choices, more information and more speed.

That’s the good news. The not-so-good news is that the evolution has also increased costs.

The state of play is similar in developed and some developing markets throughout the world, from New York to London to Hong Kong. It’s certainly the case in Canada, where heightened competition among trading venues has brought the issue to the fore.

One major item of contention is the cost of accessing the troves of price and transaction-related data that exchanges generate and electronic traders need to do their jobs in a high-speed, quantitatively oriented market.

“Many market participants state market data costs in Canada are high, and they are trying to put pressure on venues and regulators to lower costs or pass regulation,” said Iven Bryer, director of technology and operations at Fidessa Canada.

Incumbent TMX Group, whose Toronto Stock Exchange and TSX Venture Exchange handled a combined 62% of Canadian equity trading volume in 2015, has drawn fire for market data costs that some say are too high. Aequitas Neo has offered free or low-priced market data since launching 11 months ago, but it’s unclear whether the upstart exchange’s overall value proposition will be enough to compete with TMX on a long-term basis.

Iven Bryer, Fidessa

Iven Bryer, Fidessa

“Aequitas sees the TMX due to their dominant position as the biggest supporter for maintaining the current market data costs, but in reality there is pressure from all sides to try to reduce those costs, and there is much discussion, politicking and lobbying to position for an equitable solution,” Bryer told Markets Media.

“Sometime later this year, regulators may publish more rules or guidance on market data costs,” Bryer continued. “Whilst there is some thought that it might be significantly different from the regime we have now, the final solution may be anything from simply new guidance, to capped fees, or even a formula put in place to divide fees according to some market metric.”

A fee more directly related to trading that’s under pressure is so-called maker-taker. Last June, TMX narrowed the pricing differential between market participants who provide bid-ask quotes and those participants who trade off the quotes, and recently the exchange group signaled it may cut the fees — and associated rebates — again.  

“There is pressure on venues to push those down,” Bryer said. “Last year the TMX reduced fees on their Alpha venue, and Aequitas has recently reduced some of their fees and inverted their Neo market fees…We expect more reductions.”

The nitty-gritty costs of connectivity are also under the microscope, especially as the broader market continues to be a challenging one. When the buy side struggles to increase assets under management, it makes for a buyer’s market in trading and brokerage, leaving providers of those services to turn to cost management as a way to boost profit.    

The Canadian market is not as fragmented as the U.S., but the Investment Industry Regulatory Organization of Canada lists 14 active venues, ten of which have market share of at least 1.8%. Earlier this month, Nasdaq completed its acquisition of alternative trading system Chi-X Canada, adding more complexity, at least in the short term, for market participants.  

Nasdaq-Chi-X “will require changes to connect to their new trading engine, which means new market-data feeds and new order entry sessions,” Bryer said. “Whilst Chi-X and the market hopes the changes are going to be minimal, even small changes require coding, testing and deployment, consuming resource and time. This means market participants and their vendors are always playing a catch up game of keeping up with mandatory changes as far as regulation and market changes are concerned, to the detriment of innovation and providing revenue generation processes.”

“Whilst vendors may not have much weight in the data cost story, they do insulate market participants from the technical and regulatory changes to a large degree,” Bryer added. “So when a venue changes their engine or a new data feed is introduced, clients get the leverage of resource and scale that a vendor can bring, insulating them from the technical minutia.”

Featured image by Alessandro Lai/Dollar Photo Club

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