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January 2, 2012

Keeping Pace

Canadian Regulators Take Center Stage in 2012

By John D'Antona Jr.

In 2011, electronic trading and fragmentation drove the Canadian equities market into the 21st century-at least by U.S. standards. As a result, regulators will take center stage in the coming year to ensure the Great White North's markets stay accessible, secure and true to the Canadian spirit.

The Canadian markets caught up to their U.S. counterparts this past year, as new trading venues arrived there-such as Instinet's ICX and BLX dark pools and Goldman Sachs' Sigma X-more algorithms hit trading desks, and overall trading volume increased. The traditionally high-touch and big-bank-run marketplace has matured, and it now more closely mirrors that of its U.S. cousin.

According to market professionals, the Canadian market structure has raced ahead of regulation and control, leading to concerns about fair access, dark pools, high-frequency trading and gaming. Regulators are now tasked with catching up with advances in trading systems.

New order types are coming from both the public exchanges and alternative trading venues, which has led to a more fragmented marketplace. The Toronto has introduced TMX Dark, and Alpha ATS rolled out Intraspread, two new order types that sources said are attracting increased interest and volume. As these order types gain acceptance, liquidity has left either the upstairs market or other venues. For the Canadian buyside, it's a win-win, as they are mostly concerned with getting the best liquidity and price with a minimum of information leakage.

But not all are happy with more order types or venues.

James Duncan

"The common thought is that things are moving too fast here," said James Duncan, senior vice president and director of international trading at Canaccord Genuity and chair of the Canadian Security Traders Association. That is, many believe innovation is pushing forward unchecked and without a proper understanding of potential consequences.

Regulation, Duncan added, is needed beforehand to provide the framework to ensure a stable trading environment. "New order types shouldn't be driving changes in our market structure," he said. "Rather, market structure changes should be driving the need for new order types."

He added that many Canadian trading venues, like their U.S. counterparts, are trying to capture order flow without regard to the changing market structure. And that is a problem.

"We've lost sight of the big picture of how we should be dealing with the changing market structure and at the same time building confidence in the markets," Duncan said. "I don't want to see flickering orders of 100 shares at a time, guys just trying to capture spreads and rebates. Is this how we want our market structure to look?"