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March 9, 2009

Old-School Trading Up North

By Gregory Bresiger

Canada is not the United States. It is a place where culture is trumping trading technologies. It is a place of "old-school trading," says Kelly Reynolds, the head equity trader at a buyside shop specializing in small-cap, value investing in Montreal. Old-school is the personal relationship, she adds. It is negotiating deals. It is just not choosing a tool and putting numbers into a machine.



But old-school, which has its charms, also means Canada isn't keeping up with the U.S. in the march of trading technology, Reynolds notes.

"We're always behind the U.S.," says Reynolds, the head equity trader at Montrusco Bolton Investments, which is partly owned by Affiliated Managers Group.

Reynolds mostly trades Canadian stocks, although about 20 percent of her portfolio is in U.S. and EAFE equities. So, is it better to trade in the U.S. or the Canadian markets?

She is neutral, saying both have their points and that she enjoys both. U.S. trading is more electronic, she says, and when she trades U.S. stocks, she basically "is picking spots."

But in the Canadian market there is more wheeling and dealing; it requires more personal relationships. Trades are more likely based on trust than on impersonal electronic tools.

"I like that. I enjoy talking to people," Reynolds says. In Canada, one often does personal trading, she notes, and "one must develop trust." She can usually talk to a few dozen brokers or more on the phone almost every day. That's very different from trading in the United States, and that's fine with her.

Reynolds, who has a programming background, also enjoys electronic tools. She is intrigued by dark pools and "loves" the quantitative approach to trading.

But she concedes that Canadian markets need more new liquidity sources. There is not enough liquidity in Canadian markets because there is widespread resistance to new tools.

For example, she notes, the number of dark pools and alternative trading systems has grown in Canada in recent years, but those technologies have had little impact. Indeed, Blockbook, one of the three dark pools, recently closed shop and went out of business.

"There's a real problem in the Canadian markets when it comes to technology adoption," she explains. "The Canadian market is just more old-school when it comes to technology."

On Dec. 18, the Toronto Stock Exchange had to shut down because of technology problems. Traders across Canada were temporarily blinded-the spreads were so wide on the alternative exchanges that most market players closed shop for the day.



"There was absolutely no price discovery. You didn't know if you should be trading on the bid or the offer," Reynolds says.

Will the Canadian personal way of trading end anytime soon, and will new methods be adopted? Not likely. "Do I see any increase in liquidity soon? No." Reynolds says she sees no new dark pools coming north anytime soon. "We're having enough of a problem already with the ones that actually exist."

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