Canadian Fragmentation Hikes Network Requirements

Terry Flanagan

An increasingly fragmented Canadian marketplace is leading high-frequency traders and market makers to export their successful trading strategies to Canada, which in turn is driving investment in low-latency infrastructure.

“Within Canada there are 12 different venues, and Toronto alone has more venues than London, including a mixture of lit, dark and half-lit venues,” Emmanuel Carjat, managing director of TMX Atrium, told Markets Media.

“As an end user, the problem becomes how to connect to 12 different venues for a specific stock, some of which have zero liquidity in that stock,” he said.

A network dedicated to financial users, operated by those with financial expertise, offers tangible benefits over generic networks.

“We understand FIX [Financial Information Exchange protocol], market data and multicast,” Carjat said. “At the engineering level, when you create a generic network, it means multiple hubs. To connect to an exchange via a telecom company, you need to traverse three routers in each direction. We provide that through one direct connection.”

The expanded number of trading venues packed into a very small area within downtown Toronto has made low-latency networking a key differentiator, and one of the principal motivations behind TMX Group’s 2011 acquisition of Atrium Network, a provider of high-availability, low-latency network solutions in Europe and North America.

“TMX is pursuing a diversification strategy, where they’re looking to expand into things like reference data and infrastructure,” Carjat said.

On March 5, 2012, TMX Datalinx went live with an enhanced historical market data website to provide faster access to and delivery of online market data products and custom data queries, and an increase in historical quotes to 12 months from three months.

The complementary capabilities offered by Atrium and TMX Datalinx enable clients to benefit significantly from additional data content and from enhanced access to trading solutions.

“We have an ecosystem of providers that are supplying customers with historical and streaming data, plus analytics,” said Carjat. “When a customer comes on board, they get access to market data feeds, DMA and independent software vendors that can provide pre- and post-trade services, such as clearing.”

Regulators are cognizant of the impact of alternative trading systems (ATS). The Canadian Securities Administrators (CSA) and Investment Industry Regulatory Associations of Canada (IIROC) have issued proposals for pre-trade transparency, including a minimum size threshold, price improvement for orders executed on a dark pool against orders on a displayed market, and priority of execution for visible orders over dark orders at the same price on the same marketplace.

“Firms will need to provide more information about their own positions, which regulators will need to publish,” said Carjat. “All the while, trades are becoming more complex: you can buy RIM [Research In Motion] in dollars on a U.S. exchange and get out in Canadian dollars on TMX.”

The presence of so much competition within a very small footprint—all of the ATS matching engines (Chi-X Canada, Alpha, Pure, Omega) are within a square mile of each other—creates an opportunity for a company to provide the fiber to connect these venues to each other and to other venues.

TMX Atrium provides a neutral platform to facilitate communication within the global financial markets.

“Clients are asking for higher bandwidth,” said Carjat. “Ten gigabits is the norm to access multiple markets. Bandwidth and latency are becoming more important, especially in asset classes such as FX where we are seeing more providers offering real-time streaming quotes.”

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