Seven of Canada’s largest investment dealers announced their plan to establish a new alternative trading system (ATS) that will pool their internal flows and increase the country’s equity trading efficiencies.
“With these seven broker dealers banding together to launch a single ATS for internalization, it’s going to make broker internalization in Canada more efficient than ever,” says Jackie Chung, president, Competitive Metrics Inc., a strategic research and advisory firm focusing on the Canadian financial industry.
The new ATS project, known as Alpha, is significant because of the size of the upstairs market in Canada and could pose a threat to the TSX, Canada’s main exchange, says Chung. According to traders participating in the “2005 Buy-Side Electronic Trading and Best Execution in Canada Study” conducted by Competitive Metrics, an estimated 47 percent of the trades are matched through brokers’ upstairs market but that is done inefficiently through phone calls, says Chung, citing the study’s results.
“Now brokers are actually getting more automated and making internalization more electronic,” says Chung. By joining their separate pools of liquidity into a single ATS and moving in fractions of a second, that market will become very fast, she says.
“If and when the broker-driven ATS is going to succeed, they would have less need to send trades to the TSX and much reason to send internal orders to a gigantic liquidity pool,” says Chung.
The brokers may have no choice but to introduce ATSs because they are facing pressure from clients who have been asking to pay less, says Chung. “The brokers are under tremendous margin pressure to do something to reduce costs and increase efficiency,” she relates. On top of that, global brokers are setting up today in the Canadian marketplace.
ATSs are already operating in the Canadian equity trading. While the U.S. market accounts for forty-five percent of the MSCI World Index, Canada accounts for three percent of the world market cap. Since Canada is one-tenth the size of the U.S. equity market, proportionately if the U.S. has 30 ATSs, then Canada should have 3. “We have more than that, so arguably we are a marketplace that is ready for ATSs,” says Chung.
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