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February 1, 2013

Port of Call

Canada is Viable Option When it Comes to Re-Using U.S. Algorithms

By Heather Killian, Arthur Milner and Jeff Drew

Once an algorithm has reached its profitability potential in U.S. equities markets, its owner can create another successful algorithm.

Or port that algorithm to a new market.

If you're looking for a port of call, it is likely to be Canada.

Canada's markets are more similar to those in the United States than any other country's in the world. The two countries' stock indices are similar. The two countries' markets display the same volatility. The markets share overlapping high-quality listings. And, the two countries' currencies, both called dollars, run together.

Of course, Canada's markets have some structural differences. Brokers are part of the trade-matching algorithm: Orders are matched first by price, then by broker, then by time. This is in contrast to U.S. markets, where the orders are matched by price and time. Also, Canada's dark pools operate under different rules. Nevertheless, Canada is a great option when it comes to porting algorithms. Here are details on the similarities and differences between the markets.


Reason 1: Additional Volume

On an average day, 650 million shares change hands each day on Canada's equity markets, the Toronto Stock Exchange and the Toronto Venture Exchange. Around 190 of the TSX symbols are inter-listed on the New York Stock Exchange and the Nasdaq Stock Market, accounting for roughly one-fourth of all trading each day.

See Chart: Canadian Equity Volume

In May 2012, a total of 10 billion inter-listed shares traded in the U.S. and Canada. Of these, 6.2 billion shares changed hands in the U.S., while 3.8 billion shares traded in Canada. That means brokers with U.S. clients trading regularly in these names have the potential to pick up an additional 61 percent of volume by crossing the border.

However, the volume distribution of inter-listed stocks differs across sectors. For example, inter-listed financials and inter-listed telecom services execute respectively 75 percent and 84 percent of their volume in Canada. By contrast, inter-listed materials and information technology trade more heavily in the U.S., executing respectively 60 percent and 70 percent of their volume in the U.S. Trading in oil and gas shares is about the same.

About 80 percent of the trading in Canada's Manulife Financial Corp. occurs north of the border. But 80 percent of trading in Research in Motion, which makes BlackBerry devices, occurs in the United States.

Reason 2: Canadian Markets Behave Like the U.S.'s     


The primary United States and Canadian equity indices move largely in parallel.

However, in March, Standard & Poor's TSX index was flat, while the S&P 500 in the U.S. and the Dow Jones Industrial Average climbed. In June, U.S. indices again climbed while Canadian indices were flat.

Both Canadian and U.S. equity markets exhibit similar volatility characteristics, as illustrated by movement of the S&P 500 VIX and the S&P/TSX 60 VIX. Although the volatility may increase and fall almost in parallel, the magnitude of these daily moves is lower in Canada.