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September 22, 2005

Canadian Matching System Debuts with

By Michael Scotti

Canada's latest crossing system was launched last month with some success.

"We had customers on the system who entered orders, and we had a couple of executions," said Greg King, head of marketing for Markets Inc's Blockbook, a continuous crossing system that began trading August 22.

King said he expects the system to gain momentum gradually, as traders begin to incorporate Blockbook into their workflow. "It's different from how they would normally work a block," King said, "so we know it's not going to happen overnight."

Indeed, the Canadian market is essentially an upstairs dealer market. Jackie Chung, a principal consultant at eClientscope Inc, said that investors in the Canadian marketplace have difficulty finding liquidity. That's why about 53 percent of all shares trade on the block desks of brokerage firms, she said.

In fact, one crossing network has already seen its demise. ITG had licensed its Posit product to the Toronto Stock Exchange in 2002. However, the system never caught on in Canada, and the TSX closed the system Dec. 31, 2004. Chung attributed the failure to the fact that Posit never gained traction into traders' workflow. She also said three crosses daily weren't enough.

Blockbook, Chung said, faces two key challenges: Getting enough liquidity into the system, and that, like most matching engines, interest in a stock is typically one-sided.

Blockbook is a black box offering time-price priority, as well as the anonymity of size and side, King said. The system is similar to Pipeline in the U.S., he added. About 25 firms 20 buyside, five sellside have signed up to trade on Blockbook, King said. A minimum trade size is 25,000 shares, he explained.

"We really thought there was a huge opportunity in Canada to improve upon the way buyers and sellers of large blocks find each other," said President and CEO Judith Robertson, a former investment banker at Wood Gundy, who later spent 12 years at Barclays Global Investors.

U.S. investors could be involved either as direct participants if they have a Canadian subsidiary or by representation through a broker who's signed up for the system, Robertson said. The cost to trade is 2 cents a share Canadian.

The question remains whether the buyside will eschew the convenience of the upstairs desk for a new way of trading electronically. Market's Inc's Robertson thinks they will: "We're finding great responsiveness from the buyside," she said.