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August 1, 2011

Money To Be Made in Canada

U.S. Firms See Opportunity up North

By John D'Antona Jr.

Also in this article

Despite the failed merger of the Toronto Stock Exchange and the London Stock Exchange, a new era in equities of greater reliance on technology is still expected to take hold in Canada.

U.S. vendors of electronic trading see opportunities as a result of the changing market structure there. As more alternative venues spring up, traders must meet the expected increase in fragmentation with more electronic trading tools. Essentially, what has transpired in the U.S. will now happen in Canada.

Venue growth in Canada was prompted by regulatory changes in 2001-National Instrument 21-101 Market Place Operations and NI 23-101Trading Rules, together known as the "ATS rules."

Canada's main trading exchange is the Toronto, which sees nearly 60 percent of all trading volume in the country. But new alternatives, such as TMX Select, Goldman Sachs and others, are expected to pose challenges to current market leaders when they launch. Liquidnet, ITG and Instinet are the only dark pool operators to date in Canada.

Sang Lee, Aite

These new upstarts might be at a disadvantage though as the acquisition of the Toronto Stock Exchange by the London Stocks Exchange has been called off as the Canadian bourse couldn't muster enough shareholder support for the deal.

That leaves the Maple Group, a consortium of top Canadian banks, pension funds and other firms alone to scoop up the bourse. If the group follows through and purchases the exchange, the new entity could control as much as 80 percent of all Canadian equity trading volume. But that remains to be seen as a Maple acquisition still faces hurdles.

According to a press release on the TMX website, "A majority of shareholder votes cast by proxy prior to the June 28, 2011 proxy cutoff supported the merger resolution; however, it is clear that the two-thirds threshold required to approve the merger would not have been achieved."

Regardless, the expectation is that more venues will compel the sellside to hook up to these new trading outlets. Also, brokers will be forced to either upgrade their existing systems or, in the case of smaller firms, get the technology to remain competitive.

Sang Lee, a managing partner at consultancy Aite Group, said trading solution providers can expect to see demand for their services on both the Canadian buyside and sellside.

"The Canadian market is going through a tremendous amount of market structure changes-from fragmentation, adoption of more sophisticated strategies and algorithms to smart order routers," Lee said. These technological changes, combined with the growing presence of high-frequency traders and other types of traders, he said, have created a demand for innovation and more product providers.

Opportunities Abound