S3, an Austin, Texas-based firm that provides software to monitor and analyze trade execution, has launched its Canadian Best Execution Quality Suite, a package of components enabling traders to identify and prove the optimal destination for their orders, regardless of whether the destination is Canada or U.S.

“We’ve been U.S.-based thus far and there’s a demand, especially in Canada given the current regulatory environment, for an understanding of execution quality, particularly with regards to U.S. versus Canadian executions,” Mark Davies, CEO of S3, told Markets Media.

Canadian regulators have expressed concerns about retail order flow migrating south in search of payment for order flow, which is permitted in the U.S. but not in Canada. The Investment Industry Regulatory Organization of Canada has republished for comment a proposed anti-avoidance provision that would permit market participants to execute small client orders on a non-Canadian market only when the order is entered on a foreign organized regulated market (FORM) that displays order information, or when the order receives meaningful price improvement.

The real question, according to Davies, should be where can brokers achieve best execution. S3’s Canadian Best Execution Quality Suite provides traders with a number of execution monitoring tools that factor in market conditions across the U.S. and Canada, including CBBO (Canadian Best Bid and Offer) Data from all Canadian venues, including TMX, Pure Trading, Omega ATS, etc.

“IIROC is basically saying, ‘We want Canadian brokers to route within Canada if possible,’” said Davies. “What we’re seeing from clients in Canada is that they may be able to get better executions in the States for a given order, depending upon market conditions across venues in the two countries at any point in time.”

Given varying conditions between the U.S. and Canadian markets, execution considerations become more complicated and change in real time for dual-listed stocks.

“We’re helping clients determine optimal routing destinations for stocks traded in Canada and in the U.S., as best execution can be found in either country for any given trade,” said Davies. “We’re showing them how to identify when their executions are actually better within Canada, the same as we do for our U.S. clients.”

The common perception that Canadian brokers route orders to the U.S. because payment for order flow isn’t permitted in Canada “misses the point that there may not be sufficient liquidity available in Canada for every order,” said Davies. “If I’m a broker and I can route a 4,000 share order to a Toronto exchange, but there’s not much liquidity available, and if I route it to a broker in the U.S. and they internalize it, often times they’ll be able to get the liquidity that simply wasn’t available in Canada. At other times, the reverse is true and more liquidity and/or price improvement is available for a given order in Canada. We provide transparency into these shifting market conditions so that traders can achieve best execution, and improve trust by justifying their order routing destinations.”

He added, “If there’s equal liquidity available at venues in both countries at the same price, then it makes sense that a broker is going to select the one that’s most economical to them. But it’s certainly not the sole driving force. Depending on the size of the order, best execution factors price improvement, the length of time needed to execute a parent order, available liquidity, market impact, fees or rebates, among others.”

Canada is the first market to be included in S3’s World View reporting platform, which provides cross-border trade monitoring and analytics, and allows clients to determine execution quality across international markets. This simplifies the order management process when trading across country lines, preventing frustration and opening the door to better trade execution, the company said in a release.

“The goal of the World View platform is to provide cross-border market structure analytics. For now, World View includes the U.S. and Canada, but it allows a global brokerage to see all of their executions in all directions, meaning Canadian to U.S., Canadian to Canada, U.S. to Canada, and U.S. to U.S.,” Davies said. “Our intent is to expand that to other marketplaces as well.”

Featured image by tashatuvango/Dollar Photo Club