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July 1, 2011

Catching Up

Canada Follows U.S. Into Electronic Trading Era

By John D'Antona Jr.

Much of the talk these days in Canada's financial industry centers on the battle being waged for the Toronto Stock Exchange, between the London Stock Exchange and the Maple Group bank consortium. One offer, it is said, would remake the stock trading industry into a global hot spot. The other would turn the clock back, relegating Canada to yesteryear.

But behind the headlines, an arguably more consequential meat-and-potatoes drama is taking place, as Canada's stock market rushes helter-skelter into the electronic era.

In one of the latest developments, TMX Group, parent of the Toronto, is set to launch an ECN-type platform this month, in a bid to recoup market share lost to a host of electronic upstarts.

Once the only venue in Canada where traders could buy and sell stock, the exchange now finds itself being crowded out by newer, cheaper and more technologically advanced competitors.

TMX Group's new venue, TMX Select, will cater to high-frequency traders and retail day traders. The alternative trading system will seek to distinguish itself with its pricing and a few other attributes.

The Toronto's foray into the ATS business is indicative of this once high-touch, bank-run market's broader movement into the 21st century-replete with algorithms, new exchanges and dark pools-and a market structure more fully embraced in the U.S.

Heretofore in Canada, orders were phoned into dealers who did or didn't commit capital but then sent orders to the Toronto via direct market access.

Now, with the explosion of multiple trading venues, both the brokers and the buyside are increasingly using algos to get their orders filled, as well as DMA.


Changing Times

The increase in electronic trading is being driven by a confluence of factors. First and foremost, the buyside's demands for increased liquidity, lower commission rates, more control of its order flow and greater transparency are pushing the old trading ways aside. International traders looking for exposure to domestic companies want a degree of homogeneity between how the True North trades and the rest of the globe. Lastly, the regulators looking to create a more transparent marketplace are embracing the move. 

Renee Colyer, Forefactor

Whatever the case, the Canadian equities markets and market structure are increasingly looking like those of the country's southerly neighbor. 

"The impression is that we seem to be behind [the U.S. and other countries] and are playing rapid-fire catch-up when it comes to electronic trading," said Renee Colyer, chief executive at Forefactor, a Canadian research firm. "The regulators are trying to keep up with everything that is changing, and it seems like no one really can, not even the banks. A lot of people don't like change, and for some, it's hard to deal with."

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