Talking to Martin Hakker, country manager at Fidessa Canada, you get a sense of the spectacular upheaval that automation has brought to Canadian markets. Hakker says: "These are very interesting times. The industry has been used to only one marketplace, only one venue. All of a sudden there are huge opportunities here." For Hakker, the critical factor has been a virtuous circle of competition and innovation. "Canada is seeing new venues with new order types, supported by new technology providers offering new and different ways to achieve best execution. I think it's an important time right now. In the end, these changes help the industry, and they help the investor."
They help Fidessa, too. The year-end numbers show that the company grew business on its fully hosted Canadian platform by not far short of 150% from early 2008 to April 2009. "I would definitely consider the last couple of years a period of dramatic change here," says Hakker, adding: "Canada is a very sophisticated market." Another market participant expressed a similar point more succinctly. In Canada, he said, demand for advanced trading solutions is "skyrocketing".
Why? And what's in
this for the rest of us?
To run briefly through the history, the significant regulatory changes happened in 1999, alongside a re-organisation of equities trading in Canada, and had the effect of, first, enabling a competitive trading model, and secondly, allowing in ATSs to compete alongside the established exchanges. Operating rules for ATSs were finalised in 2001 and then nothing happened. The technology just wasn't there, and in those distant times, investing in smart-order routing technology was seen as an eccentric extravagance. Would-be automated traders sat on their hands for nigh-on five years, and would have been sitting there still, but for developments elsewhere.
"The success of ATSs in Europe and the United States provides operational examples for the Canadian market," says James Kang, author of the recent [April 2009] report "Market Fragmentation in Canada: The End of a Monopoly?" put out by Aite Group (www.aitegroup.com). As Kang's title suggests, in trading terms, Canada does have some features in common with the US and Europe, and while there is no exact Canadian equivalent of the EU's MiFID, the recent past has been chartacterised by a process of fragmentation that would be familiar to a Europe-based trader. ATSs now have around a 10% market share of the Canadian equities market, which is significant in that they had a market share of close to nothing just a year ago (Aite Group figures, comparing March 2008 with March 2009).
There are six automated trading systems in Canada, between them offering both lit and dark liquidity. These are: Alpha, which trades into the Toronto Stock Exchange (TSX) and TSX Ventures and is a joint venture between Canadian financial institutions; Chi-X Canada; Liquidnet Canada; Omega; Pure Trading; and TriAct Canada Marketplace, which is a subsidiary of ITG Canada. The significance of that list is not just the combination of indigenous operations with a few names that we might recognise from other markets, but also how recent it is. The oldest ATS in the list is Liquidnet Canada (launched May 2006) and the newest, Alpha (launched November 2008).
As if to underline the point that this is now a competitive market for trading systems, there has already been one casualty: the BlockBook ATS launched in 2005 and closed in February 2009. Hakker says: "Traditionally, if you wanted to trade in Canada, you traded on the TSX. There was one exchange and that was where you did your business. We now have alternatives, and we have fragmentation. With that comes the requirement for smart-order routing and the technology around that to provide best execution." The technological "arms race" continues: even as this feature was being finalised, news came in that Chi-X Canada had launched a sequence of enhancements to its proprietary smart-order router (including, for example, access through Chi-X Canada to Alpha).
But the ATSs don't have it all their own way. The TMX Group
(parent of the TSX and TSX Ventures) completed the roll-out of
its own smart order routing solution in late April 2009. The TMX
Smart Order Router "provides subscribers with trading access to
all visible Canadian marketplaces trading Toronto Stock Exchange and TSX Venture Exchange listed securities," says Kevan Cowan, Group Head of Equities at The TMX Group. But perhaps more significant from our perspective is The TMX Group's annual "US Campaign", which has been running for three years and aims to bring US companies across the border to get themselves a listing in Canada. Cowan says, "We're confident that our equity exchanges present an excellent financing alternative."
Take that as a convenient indicator of Canada's other USP. It isn't just that there is a sufficiency of dual-listed stocks on the TMX, with perhaps some prospect of a pricing differential, nor indeed that there are more mining stocks on the TMX/TMX Ventures than anywhere else in the world; the main attraction is that this is a big, liquid globally open market with a lot of liquidity coming from the "pool" across the southern border. But more than that: this is a market where automation and fragmentation have occurred pretty much simultaneously; the impact of the former is to connect Canada globally; the impact of the latter is to leapfrog many of the stages involved in making that connection.
It would be ridiculous to describe Canada as an emerging market, but in our terms, the country has certainly emerged - and in a very short space of time. It's almost as though the "playing field" is level in the sense that any US or post-MiFID European trader would recognise the fragmented landscape of competing venues, the competition, the emphasis on ever-smarter order routing and connectivity. But the playing field is potentially very much uneven in the sense that the incumbent players haven't been doing this very long. Canadian firms like Raymond James and Desjardin may have, as it were, smartened up their order routing, but there's a lot of competition coming in from across the US border and beyond. Fidessa, for example, offers a "global connectivity service" that effectively enables outsiders to trade as insiders.
Canada's open, and Canada's automated. The whole country's a trading opportunity. Maybe it's time to get involved.
Formerly head of electronic trading and prime brokerage at National Bank Financial, James Niosi led the team behind the launch of Horizons Multi Strategy Group (HMSG) in January 2009. HMSG is a division of MGI Securities. James Niosi spoke to William Essex in April 2009.
What are the asset classes for which auto and algo are used in Canada?
Typically you can trade equities, options and futures all electronically, although derivatives are considerably less liquid in Canada than in the US and parts of Europe. The primary equity market, The Toronto Stock Exchange, is good at handling algorithmic order flow, and more recently Chi-X Canada, which is robust at handling a high number of messages per second. Therefore, it's typically equities followed by futures and then options in that order.
Do you see a lot of new players coming into the Canadian market?
We are witnessing more electronic liquidity providers coming into Canada tightening up spreads on equities, however, with small displayed size. The Montreal exchange has attracted some strong US market makers to their options market but it's a tough market to call due to a lack of liquidity. So they're trying to do what the equities exchanges have done, which is to lower the barriers to entry for access resulting in increased volumes and liquidity. But we haven't really seen the fruits of those ambitions yet.
What lessons do you draw from the US and European electronic trading experience, and what could they learn from you?
What we're drawing upon from the US is market microstructure. When they first allowed ATSs into Canada, there were, for example no inter-market linkages mandated. Initially, if you wanted to connect, you had to provide all network connectivity and linkages in order to satisfy best price obligations. The US promoted intermarket linkages very early on. In Canada, there has been a three-year period of lost time in my opinion, because now the regulators in Canada have mandated that it's up to the venues to ensure that there are linkages between each other, and you're not going to have to bear that entire cost of technology and routing and connectivity.