Industry prepares for battle of exchanges

By Mark Noble | June 13, 2007 | Last updated on June 13, 2007
3 min read

Alpha. Pure Trading. ATX. ICX. The growing number of alternative trading systems is adding a level of complexity that dealers will have to understand to find their investors optimal trades.

In less than a year, the TSX has gone from being essentially the only game in town to fighting off three new public electronic exchanges that want a piece of its market share. CNQ was the first to throw its hat in the ring with the Pure Trading platform (expected to launch in July), while the “Big Six” banks have spearheaded the secretive creation of the Alpha system. And earlier this week, Instinet, one of the world’s leading electronic brokers, announced it will launch a system. TSX has responded by launching ATX, its own alternative trading system.

Richard Carleton, vice-president of corporate development for CNQ’s Pure Trading, says the flurry in ATS activity has been driven by the success of similar electronic platforms in the U.S.

“An electronic communication network that offers extremely fast execution capabilities with high volume and low latency could in fact win market share from the incumbent exchange,” Carleton told attendees of the sixth annual Canada Cup of Investment Management conference in Toronto on Tuesday. “That’s what’s driving the explosion in exchanges in Canada.”

He says Pure Trading will have all of the TSX’s listed stocks and has on board all of the major brokers, who conduct more than 95% of the daily trades on the Toronto Stock Exchange. Once up and running, dealers will then have two major platforms on which to conduct trades on behalf of clients. Alpha will presumably have similar clout since it will be directly operated by most of those major brokers, Carleton adds.

But a greater number of players means that profit in the exchange business may have to be derived from other sources. The panelists all agreed that competition will force exchanges to be more efficient, but it might also reduce the value in offering broad-based trading since exchanges will have to offer lower trade costs on more limited trading volume.

“I don’t believe anybody building an ATS doesn’t want to make money,” says Thomas Kalafatis, director of sales and trading for TSX Group.

One major battleground is data distribution, which is determining who gets to compile the trading information for all of the exchanges, he adds. Currently, securities regulators have asked for bids from exchanges to determine who will be data consolidators.

Glenn Goucher, senior vice-president of the Montreal Exchange, notes his exchange has transformed itself into a niche market provider as a leader in derivative trading for institutional investors. “But we also want to be a centre for liquidity and the centre of data distribution,” he adds.

Kalafatis says that the TSX cannot afford to lose out on data consolidation to another competitor, so it has also filed an application. But officially, the TSX thinks the market is best served by a competitive data distribution system, which currently makes it incumbent upon dealers to keep on top of all the exchanges.

While some industry observers are concerned they won’t see a full depth of market display from their data vendors, Carleton believes market fragmentation has optimized trading for clients in the U.S. He believes dealers will rise to provide an optimal service for their clientele because most of the major dealers will implement a “smart order router,” which will seek out the best execution opportunities for client orders.

“If the experience in the U.S. is followed, you will see a narrowing of spreads; the trading fees on the sell side will decline; and we have a strong expectation that liquidity, particularly for retail-sized orders, is likely to improve quite dramatically.”

He expects that these companies will have higher profit margins since they are effectively buying for less and selling for more.

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Mark Noble