01.24.2017
By John D'Antona

TSX Targets Currency Risk

The Toronto Stock Exchange is looking to broaden its horizons and has petitioned its market regulator to allow it to launch a new trading board.

The TSX filed with the Ontario Securities Commission that would permit the Canadian exchange operator to launch an International Trading Board for S&P 500 stocks, which will allow certain US-listed stocks to trade in Canadian dollars.

In the filing, obtained by Traders Magazine, the TSX initially will likely post for trading securities included in the S&P 500 index, which TSX believes represents a universe of symbols likely to be the most traded by Canadian investors. These will be enabled for trading on a phased basis, starting with 30 to 50 symbols. Other liquid US-listed securities may also be enabled for trading based on customer demand.

By listing US-listed securities in the Canadian currency, the TSX looks to increase the accessibility of these securities to Canadian investors in their own money – eliminating currency risk. Also, traders who use the TSX can hope to see improved liquidity and additional trading opportunities they might not normally be eligible for.

US-listed securities will not be listed by TSX, but will only be posted for trading similar to how a Canadian ATS posts TSX-listed securities for trading now. Further, the US-listed securities that are posted for trading on the TSX International Board will also always exclude those that are or become inter-listed on an exchange in Canada.  Only securities listed on a US exchange that are not also listed by a Canadian recognized exchange will be eligible for trading.

Nick Savona

In looking at the details, US-listed securities are intended to trade and clear through existing TSX and CDS infrastructure and processes, the trading functionality of the TSX International Board will generally mirror the functionality for trading in TSX-listed securities on TSX with limited exceptions. This approach was adopted to minimize impact to, and maximize potential take-up by, investors and market participants.

According to TSX, the proposal will help its clients by providing additional trading opportunities for clients “while experiencing reduced frictions in the clearing and settlement process.” Smaller dealers, it added, may particularly benefit to the extent that offering trading in US-listed securities to their clients necessitates costly and complex southbound trading and clearing relationships.

TSX also expects that the introduction of trading in US-listed securities on TSX will facilitate new ‘market making’ opportunities by firms that can post quality prices in US-listed securities based on their experience in cross-broker trading.

As a further draw, TSX said that no new connections will be required to access trading in US-listed securities as all trading will be conducted on the existing TSX trading infrastructure, and more specifically, on the same trading platform. Orders are to be entered with a price denominated in CAD. Orders will therefore be posted, displayed and traded in CAD.  Trading in US-listed securities will be disabled on US holidays when US markets are closed but Canadian markets are open. There will also be no opening auction, MBF session or closing auction for these securities.

Lastly, there will be no special trading sessions and continuous trading only between the hours of 9:30 a.m. and 4:00 p.m.

According to the TSX, it expects these changes and the new board to become effective in the second quarter of 2017.

The TSX noted that as it relates to compliance with regulatory requirements, in particular the Canadian Order Protection Rules (OPR) under National Instrument 23-101 Trading Rules, which will not apply on the basis that OPR does not apply to ‘foreign exchange-traded securities’.

“To the extent that more than one Canadian marketplace is displaying orders on the same US-listed securities, it is our understanding that these orders will therefore not be protected from being traded-through. TSX will, however, apply its OPR trade-through prevention mechanisms in the same way as it does currently for TSX-listed securities so that these will provide consistent outcomes for dealer routers and algos should another Canadian marketplace trade the same symbols,” the TSX wrote in its filing.

This is not the first time a Canadian trading venue has become a place for securities listed on a US exchange to trade on it. TSX in its filing noted that the OSC had previously allowed Lynx ATS to post securities listed on NYSE, Nasdaq and NYSE MKT when it launched.

Nick Savona, a Canadian-based former sales trader and now a capital markets adviser, told Traders Magazine that the TSX proposal might not provide the benefits touted to retail investors, small brokers and market makers as advertised.

“The focus of the TSX’s proposal is on benefits to retail clients, including improved access to U.S.-listed securities, as well as greater transparency and reduced FX costs. The TSX does not make a compelling argument in this regard,” Savona told Traders Magazine. First, as the TSX acknowledges, retail clients are quite active in trading U.S. securities, indicating that this market is already easily accessible. Second, trading U.S.-listed securities in Canadian dollars reduces rather than increases the transparency of FX costs—clients will have no idea of how foreign exchange has impacted the price that they receive.”

Furthermore, Savona said that while the TSX International Board may provide more competitive foreign exchange, clients would have no way of determining this, given the lack of transparency in the TSX.

“Moreover, now that many dealers offer U.S.-dollar denominated registered accounts, foreign exchange costs for the retail investor have significantly declined. Nor does the TSX make a compelling argument with respect to small dealer benefits,” Savona explained.

As Savona sees it, small dealers access the U.S. market via their clearing broker as part of bundled services that makes it impossible to ascertain whether an alternative is more cost effective or efficient. Secondly, choosing between two symbols for the same U.S.-listed security in making the routing decision to a U.S. market or the TSX International Board will require some effort in educating the advisor or the client—time and energy that dealers are unlikely to expend given intense competitive pressures.

“This leaves market makers who have expertise in cross-border trading as the final constituency that may benefit from the TSX International Board,” Savona said. “Indeed, this constituency may benefit from arbitrage opportunities that will surely arise. These may very well be HFTs who always seek opportunity to trade against retail flow. However, if the TSX International Board cannot deliver the retail clients, HFTs are not likely to participate.”

According to ITG Canada researchers, who noted the TSX filing in its latest Global Market Structure Commentary, said that If successful, the program would look to add other prominent European and Asian listings.

“There is a clear demand for this offering from market makers, who see an opportunity in bypassing the relatively large FX spreads experienced by many retail investors when effecting foreign equity transactions. However, most of the order flow actually runs through large Canadian banks so it is unclear what appetite they will have for a platform that reduces their FX trading flows,” ITG said. “The TSX also contends that orders on the new international board should be subject to Canadian dark pool rules. We respectfully disagree, as they are not Canadian listed securities.”

The comment period for the TSX proposal runs through February.
 

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