Canadian retail order flow is heading south of the border to the U.S. And that is good news for wholesalers in the U.S.
New research from market consultancy Tabb Group said that there has been a decline in Canadian/U.S. interlisted market share as the economic s of order execution have changed in Canada. In other words, it’s gotten more expensive to trade in the Great North.
Tabb research analysts warned that this erosion of order flow in Canada’s capital markets may have far reaching impact in the current low commission/moderate volume environment. Brokers, faced with increasing costs and the Canadian regulatory environment, could see order flow shift to U.S. brokers who face fewer regulatory costs and already have embraced the cost of new technology.
Canadian brokers are currently executing fewer trades amid the fixed costs associated with the country’s Order Protection Rule. The Order Protection Rule sets mandates and standards for connectivity, market data and membership costs. These regulatory changes and their requisite costs of compliance have affected multiple markets and broker-dealers – including some of the smaller independent brokers, who have been forced to exit the execution business. This in turn has further reduced liquidity and choice for Canadian investors.
As a result, trading in Canada becomes more expensive, and dealers told Tabb they are turning to the U.S. for cheaper order execution.
“Since U.S. wholesalers already offer greater liquidity, that stokes fears that as brokers continue moving interlisted order flow south, liquidity in the Canadian markets will shrink further,” said Sayena Mostowfi, a Tabb senior research analyst and co-author of “Canadian Equity Retail Trading: Smart Order Routing and Regulation.
Wholesalers pay retail brokers for their orders and make markets in the stocks. The business has been dominated in the U.S. by KCG, Citadel, Citi, UBS and Susquehanna.
The full 18-page report is available http://www.tabbgroup.com/Login.aspx.
