Market Fragmentation the New Normal in Canada

Terry Flanagan

Market fragmentation is a reality in Canadian markets. The question is whether that’s good or bad, and the answer is that it’s a little of both.

The proliferation of trading venues—some dark, some lit and some a little of both—puts the onus on trading firms to have connectivity to all venues and that requires up-front expenditures on smart-order routing, co-location and other services associated with algorithmic trading.

The good news is that once firms are up to speed with these technologies, they will be in a better position to trade not only in Canada, but in other markets as well.

“The Street is polarized on market fragmentation in Canada,” said Sean Debotte, director of business development at Omega ATS, a Canadian alternative trading venue. “I believe that fragmentation is a good thing because it creates more competition. A lot of people equate fragmentation with an arms race, but I see it as more like a space race, where innovation drives benefits like market data, new trading tools and order types.”

Sean Debotte, Omega ATS

Sean Debotte, Omega ATS

These benefits “come from competition between multiple market venues”, Debotte said. “These wouldn’t happen without fragmentation,” he added. “That said, the cost of technology and connectivity to multiple markets is significant.”

TMX DatalinxM, TMX Group’s information services division, has welcomed ITG Canada to its recently completed co-location facility.

ITG and its broker-neutral crossing network, Match Now, have completed their technology migration into the expanded facility.

“Being chosen by ITG to host their Canadian infrastructure highlights our position as the premiere exchange co-location facility in Canada,” said Eric Sinclair, president of TMX Datalinx and group head of information services, in a statement. “All of the clients in our co-location community will benefit from the presence of ITG and Match Now technology assets.”

TMX Group recently completed the fourth phase of its co-location facility. The construction of this phase included making significant infrastructure upgrades and expanding the facility’s physical security.

“Client demand for our co-location service remains strong and confirms the value we offer,” Sinclair said. “We are now over 70% subscribed.”

CX2 Launch
Chi-X Canada ATS, a wholly-owned subsidiary of alternative trading venue operator Chi-X Global Holdings, announced earlier this week the pricing schedule for its new altenative trading system, CX2 Canada ATS, which is scheduled to launch on May 3.

“Over the last five years we have remained committed to lowering the overall cost of trading in Canada through the introduction of innovative pricing and services that enhance trading performance,” said Dan Kessous, chief executive of Chi-X Canada, in a statement. “We are excited to unveil a pricing schedule for CX2 that will provide an under-serviced segment of the market with greater choice and cost savings opportunities.”

Chi-X Canada is a high-performance alternative trading system marketplace for the trading of Toronto Stock Exchange (TSX) and TSXV-listed securities.

The market, which is the largest ATS platform in Canada, offers strict price/time priority, post-trade attribution, market-agnostic smart routing, advanced order types, trade reporting, risk management tools, historical market data, co-location and cross connectivity services.

Chi-X Canada and its new market place CX2 aims to provide cost savings to investors through trading efficiencies, ultimately helping to improve investment performance.

“Following the TMX Group’s acquisition of Alpha, we have heard calls from the industry for greater competition,” Kessous said. “With the introduction of CX2, we will provide a market place that services both the retail investor and small to mid-tier brokers, groups that are currently disadvantaged on other markets.”

An increasingly large portion of trading in Canada is being conducted without pre-trade transparency, or ‘in the dark’, yet little is known about the market quality impacts of their introduction, according to Sean Foley, a researcher at Capital Markets Cooperative Research Centre, an Australia-based think tank.

“Dark pools aim to encourage large traders to express latent liquidity in a public setting,” Foley said. “However, as these orders become smaller and smaller, it raises questions about price discovery and fair access to the market. The OSC in Canada has proposed new legislation to curb dark trading. However, little concrete evidence on their market quality impacts is available.”

In October 2012, new rules were approved by Canadian securities administrators and the Investment Industry Regulatory Organization of Canada, which require that an order entered on a marketplace must trade with visible orders on that marketplace at the same price before trading with dark orders at the same price on that marketplace.

The rules would mandate minimum price improvement by dark orders over the NBBO [national best bid and offer] by one full tick.

Often compared to the trade-at rule in the U.S. markets, the idea is to prevent dark orders from jumping in front of visible quotes by some fraction of a tick, and potentially de-incentivizing investors from placing visible bids and offers in the lit market.

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