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February 1, 1998

Canada's Electronic Trading Pipeline

By Michael L. O'Reilly

With the surge in U.S. order flow, several technology vendors are integrating systems to streamline and modernize the trading of Canadian equities.

Toronto's VERSUS Technologies is a developer, distributor and licenser of electronic trading systems, and the parent of electronic brokerage firm VERSUS Brokerage Services (VBSI) and The VERSUS Network (VTN). The VTN is a private electronic network connecting institutions and investment dealers to Canadian exchanges and other liquidity sources.

Brokers sponsor institutional access to the VTN. VBSI, the 15th largest Canadian broker dealer, is one of 17 participating brokers in the VTN. "What we offer is ubiquitous access," said John Reilly, chief executive officer of VBSI.

Here's how U.S. traders use the VTN: After entering the Canadian stock symbol in the system, the user receives a quote in U.S. funds with the current quoted spread and size. The order is then sent to the appropriate exchange. The participating Canadian broker receives an agency commission on the American order. Filled orders are reported to the system in U.S. dollars.

Reilly said the sponsoring broker pays 12 percent of their agency commission to the VTN. The client pays only when VBSI is the sponsoring broker.

The VTN has a daily volume of roughly 20 million shares, and routes about 20 percent of the electronic orders directed to the Toronto Stock Exchange and the Montreal Stock Exchange, according to Reilly.

Participants handling more than 90 percent of Canadian assets have VTN access. VTN users can interface through the network with market-data and backoffice service providers.

At the moment, VERSUS operates the only major electronic trading system in Canada. Still, other systems are in use on Canadian desks including platforms from U.S. vendors Davidge Data Systems and Automatic Data Processing, and the Canadian vendor Dataphile Software.

DAVNET, the New York-based Davidge's message-routing network, links brokers with exchanges and institutions with brokers. DAVNET routes over 50,000 messages each day between 1,000 institutions, 80 brokers and 27 exchanges and market makers.

Users of DAVNET can buy the system and pay a licensing fee, or become a monthly subscriber, paying a U.S. $650 monthly fee, plus a U.S. 25 cent per-execution charge for all fills.

John Davidge, sales manager at Davidge, said DAVNET is more oriented to the sellside as a tool for retail customers. "With a system like VERSUS [the VTN], it is a more developed platform with full service in one place," he said. "We feel like we give our Canadian clients more choices. They can integrate other applications and make their own choices with DAVNET."

A competitor in Canada and the U.S., Automatic Data Processing is a Roseland, N.J.-based provider of electronic transaction processing, data communications and information services. Last year, their brokerage system handled an average of 475,000 trades in North America each day. The company boasts 750,000 clients with links to more than 18,000 dealers worldwide.

Dataphile Software is a Vancouver-based vendor operating a front-office system for order management and portfolio analysis. The company, which also offers a real-time backoffice system and an Internet-accessed account system, processes more than 500,000 orders a year.

"You have to find the newest ways to satisfy American clients," said Paul Chalmers, director of international trading at Vancouver-based Canaccord Capital and Dataphile client. "Using the current technology is a way to do that."

Canadian Securities Industry The Statistics

1997 1996 Change

Firms 182 180 1%

Employees 31,962 28,891 11%

Integrated-Firm Revenue $4,281 $3,503 22%

Institutional-Firm Revenue $981 $869 13%

Retail-Firm Revenue $973 $971 0%

Firms With Profits 143 140 2%

Firms With Losses 39 40 -3%

Operating Revenue $6,235 $5,345 17%

Operating Expenses $2,479 $2,103 18%

Operating Profit $1,541 $1,413 9%

Note: Figures tabulated January to September

Note: All dollar figures in millions, Canadian

Source: Investment Dealers Association of Canada