Fed up with high fees and limited competition, Canada’s biggest banks and major investment dealers have announced their intention to establish a new alternative trading system that will compete head to head with the Toronto Stock Exchange.
The new trading system, which is currently dubbed Project Alpha, is being headed up by Jos Schmitt, who was senior partner at Capco and former head of strategy and market operations on the board of the Brussels Stock Exchange.
With the addition of another trading platform, suddenly the market is looking a bit crowded. The intention to launch an ATS comes just days before Pure Trading, CNQ’s alternative visible auction market in Canada for exchange-listed securities, conducts the final test of its system.
“Global capital markets are changing,” said Schmitt in a release. “The future strength of Canadian capital markets depends on our ability to achieve the same kind of efficiencies already being realized around the world by leveraging today’s technology.”
The ATS is being designed to find efficiencies and increase competitiveness and liquidity on the Canadian market. The new ATS will take advantage of National Instrument 21-101, which was approved by the Canadian Securities Administrators in 2001.
The national instrument laid out a set of comprehensive requirements for order and trade reporting, information consolidation and market integration to ensure fair and transparent trading. It also placed a requirement on traders involving best price obligations and best execution practices.
Before the introduction of the new requirements, dealers’ obligations were limited to the markets where they had actual trading access, which wasn’t an issue when there was only the TSX to worry about. Under the new rules, dealers will be required to get the best price for their clients regardless of whether it’s on the TSX or on another exchange, like Pure Trading, whether they have access to that market or not. In those cases where dealers don’t have access to a market, presumably Pure, the member will have to make arrangements through a jitney to put orders on the exchange if it offers the best price.
While it’s too early to identify the winners and losers from this increased competition, the market was betting heavily against the TSX. Shares in the publicly traded exchange closed down 12% following the announcement. The Montreal Exchange’s stock was also lower, falling 4.3%.
The dealers involved in the creation of the new ATS include BMO Capital Markets, Canaccord Capital Corporation, CIBC World Markets, National Bank Financial, RBC Capital Markets, Scotia Capital Inc. and TD Securities Inc. The new trading system is expected to launch in 2008 subject to receiving the required regulatory approvals.
Filed by Mark Brown, Advisor.ca mark.brown@advisor.rogers.com.