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October 3, 2011

SIGMA X Skates Into Canada

By John D'Antona Jr.

Goldman Sachs Electronic Trading announced Aug.19 it has launched its dark pool, Sigma X, in Canada.

Adam Mazur

Goldman Sachs Canada Inc. will offer access to Sigma X Canada to registered investment dealers and their clients to trade Toronto Stock Exchange listed securities. Sigma X was launched in the U.S. in 2005.

Sigma X Canada is comprised of a host of liquidity providers, including broker-dealers, hedge funds and institutions, in addition to Goldman Sachs liquidity. The matching engine resides in a third-party Toronto data center, and subscribers can access the dark pool via direct FIX connectivity or a variety of EMS/OMS vendor providers.

Sigma X Canada will anonymously match buyers and sellers based on price-time priority and offer guaranteed price improvement relative to the national best bid and offer, said Adam Mazur, managing director and co-head of business development for GSET.

"In its first iteration, Sigma X Canada will reward the provider of liquidity with 90 percent of the spread and the taker will get 10 percent," Mazur said.

The Investment Industry Regulatory Organization of Canada, the self-regulator of the Canadian equities markets, recently proposed that dark pools must offer some type of price improvement over the National Best Bid Offer for trades to take place in unlit venues. Historically, Canadian trading has primarily taken place on the public exchanges.

According to the latest data from IIROC, dark pools have maintained roughly 3 percent of total daily trading market volume. ITG garnered a 1.6 percent share in July, versus 1.8 percent in March. Liquidnet, which focuses on block trades, had 0.12 percent of the market in July, compared with 0.17 percent in June. Instinet, having just started its own pools in June, captured 0.002 percent of volume in July versus 0.004 in June.

In contrast, the Toronto Stock Exchange captured 41 percent of monthly trading volume in July, down from 43 percent in June.

Sigma X Canada will also allow users to indicate their orders with a minimum-size requirement. That is, no order can be executed unless it can be completed for a user-set predetermined size.

"We are concerned about predatory behavior, and there are a number of different mechanisms in place to look for gaming within the pool," Mazur said.

Goldman Sachs incorporated surveillance reporting within the pool, in addition to its monitoring trade execution quality and checking for minimum trade size.

There are four other dark pools operating in Canada: ITG's Match Now, Liquidnet and two from Instinet. There is also market speculation that still more dark venues could come from Alpha, Morgan Stanley and Credit Suisse, either later this year or next year.

Competing Canadian dark pools looked on the arrival of Goldman's Sigma X with mixed opinions. One operator told Traders Magazine he welcomes the dark pool to the Canadian marketplace.

"As long as any marketplace or dark venue is offering unique value, it's a good thing," the operator said, referring to Sigma X. "We don't want fragmentation for fragmentation's sake. It looks like Goldman Sachs has incorporated several unique features in their pool, so we're not against it."

Mike Bignell, president of Omega ATS, said that while dark pool volume in Canada has remained mired at around 3 percent, the addition of Goldman Sachs' Sigma X pool could hurt his business. As of July, Omega captured 2.24 percent of total daily Canadian equity trading market volume.

"Goldman Sachs is a terrific competitor and brings more notoriety to the Canadian dark markets," Bignell said. "But every new competitor that comes here has the potential to eat away at our market share."