Most ETFs in Canada trade in a fragmented market: on any given day, the same ETF can trade on 13 different exchanges or alternative trading systems (ATS). Yet, not all advisors have access to information from every market, depriving them of data that would allow for better ETF trades.
The problem lies in how advisors and retail investors access ETF price and volume data. According to NEO Exchange Inc., all retail investors and more than 90% of investment advisors only have access to market information for securities listed on the Toronto Stock Exchange (TSX) and TSX‑V. Using a provider that only reports on those exchanges saves their brokerage firm the cost of obtaining real‑time market data from other trading systems.
Investors can find accurate quotes for ETFs, including real-time and delayed data, on a number of different platforms including Thomson One, Yahoo and Google Finance, according to a BMO Global Asset Management report from earlier this year.
“The challenge for investors is finding an accurate picture of total volume across marketplaces. While the TSX often gets all the attention, it’s not the only marketplace in Canada,” the report stated.
ETFs listed on the TSX may trade on various exchanges and ATSs. As of May, 42% of Canadian ETF volume traded on a TSX‑owned platform, 35% on a NASDAQ‑owned platform, and 18% on a NEO platform, according to NEO. The rest of the volume was traded on ATSs.
For some ETFs, the share of trading volume on the TSX is even lower. In May for instance, 16% of RBC Global Asset Management’s ETF volume was on the TSX, compared with 18% of Invesco’s ETFs, according to NEO.
This may lead an investor to not invest in an ETF because they incorrectly believe it’s not trading enough, says NEO president and CEO Jos Schmitt.
He’s been calling on regulators to require that consolidated market data be made available to all investors, as the current situation not only affects investor information but can also be detrimental to the market as a whole — such as during the TSX disruption earlier this year.
On Feb. 27, a system capacity issue caused a halt in trading on the TSX, TSX-V and TSX Alpha. Schmitt says trading volume was reduced to about 20% of normal activity, as more than 90% of advisors and all retail investors left the market. Only professional investors with consolidated market data access continued to trade using other platforms.
Patrick McEntyre, managing director, electronic trading and services at National Bank Financial, said this created a chain reaction: because passive volume flow from retail investors tends to be sent to the TSX, liquidity dries up when the TSX ceases to operate. Institutional investors realized they no longer had a full picture of what was happening, and foreign traders — who often only have access to TSX data — also scaled back or shut down their operations, he says.
The disruption shows the problem goes beyond market data, McEntyre says: there’s a perception that the TSX is the only place where prices are set because that’s where many investors get their information.
A trading halt like the one the TSX experienced in February would have gone unnoticed in the United States, Schmitt says, where investors have access to consolidated market data. He says Canadian regulators have done nothing to address the issue even though they’ve known about it for years.
Such a trading disruption is detrimental to capital markets, Schmitt says, and gives foreign investors the impression that Canada can’t be taken seriously.
Sylvain Théberge, media relations director with the Autorité des marchés financiers, says the Canadian Securities Administrators’ indicated in their 2019-2022 business plan that they would monitor the international situation and review the Canadian approach to market data, including the application of the fair access principle and the regulatory review process.
In the meantime, if advisors are not given access to consolidated data by their dealers, they can adjust their software to capture it. However, such data is typically provided with a 15‑minute delay. Various sites, including Stockwatch, also provide consolidated but lagged data.
There are ways to get the total volume on the TMX website, but the information is delayed because there is a cost to receiving real‑time data from other trading platforms, says Graham Mackenzie, head, ETFs and structured products, at TMX Group Ltd.
This issue of distributing volume data is more critical for equity trading, where a security’s liquidity is linked to its volume. For an ETF, liquidity depends on the liquidity of the underlying assets, and a market maker can create or redeem new ETF units based on supply and demand. As a result, ETFs with highly liquid underlying assets can easily increase or decrease their volume.
Schmitt says the Investment Industry Regulatory Organization of Canada’s (IIROC) method for compiling its list of securities eligible for reduced margin (LSERM) has been another source of frustration.
Published every three months, the LSERM sets out the instruments that “are fully marginable, meaning they can be used for larger financing arrangements,” Schmitt notes. For a security to be included in the LSERM, it must be sufficiently liquid and have low price volatility.
According to Schmitt, IIROC relied solely on the volumes recorded on the exchange the ETF is listed on to assess whether an ETF should be on the list. An ETF that traded 30% of its volume on the TSX would likely be prevented from fully developing its potential, he says.
Schmitt describes the case of a client who used an ETF as collateral for other transactions because the ETF was on the LSERM. The following quarter, the same ETF was no longer included because its TSX trading volume had fallen, even though its consolidated volume held relatively steady.
The client was forced to reconsider his positions because the volume across all markets is not taken into account. This also frustrated his advisor and the ETF manufacturer, who was none too happy to discover the reason for this situation — which should have been resolved 15 years ago from the outset of multiple markets in Canada, Schmitt says.
IIROC updated its LSERM process over the summer. In a July 28 notice, the regulator said it’s “now leveraging our in-house data including consolidated volume data feeds for multiple Canadian exchanges. As a result, securities from all Canadian exchange markets whose listings are eligible to be carried on margin are considered for eligibility on the LSERM.”
Goal: improved data reporting
Schmitt is also campaigning to improve reporting to clients, this time on their account statements. The value of a security is often reported based on the last traded price. This method works well for ETFs that trade frequently, but becomes problematic for those with lower volume. The latest quoted market price may show an outdated fund value that’s different from the value of its underlying assets because the market price is several hours or sometimes days old.
Schmitt uses the example of an ETF a client bought for $10 whose underlying securities have a net asset value of $12. If the ETF has not traded recently, its last closing price may be $15, but its underlying assets could have declined in value since the last trade. This provides clients with inaccurate information, which could result in the wrong selling decision.
As a result, for securities that are not frequently traded, NEO proposes reporting the time‑weighted national best bid/offer midpoint price, which would resolve the issue of infrequently traded ETFs.
McEntyre says this is a fair solution for reporting the value of ETFs that trade infrequently, but he thinks the market may not understand it properly.
Adopting net asset value (NAV) reporting has sparked debate in recent years. NAV can also be out of date or difficult to obtain, such as when based on closing prices of foreign securities. For example, Australian stock markets are closed when North American markets are open. In addition, a significant portion of the ETF market in Canada consists of actively managed funds.
Catherine Kee, senior manager, corporate communications and media relations with TMX Group, says NAV ignores the risk, capital and profit margin required for market makers to play their role in the ETF market.
NAV is not the value clients obtain when they sell an ETF, because buyers — often market makers — have to pay fees on the purchase or sale of a basket of underlying securities, stock exchange fees and foreign exchange costs while also earning a profit.
McEntyre says the last bid or a blend of published bid prices at the end of a day is a more reliable way to value an ETF than NAV.
This article was originally published in Finance et Investissement. For more context on ETF marketplaces, read this story’s companion piece (in English), from our sister publication Investment Executive.