Order Protection Rule Will Re-Shape Canadian Market Structure

Canadian markets appear to be heading into a very interesting year. On the back of continuing growth, several forces will re-shape market structure, particularly in Toronto.

These forces include the continuing competition between alternative trading systems (ATSs) and the Toronto Stock Exchange (TSX). Also on the horizon is the order protection rule established by the Canadian Securities Administrators, due to take effect on Feb. 1, 2011. Lastly, more markets and financial firms are co-locating at Toronto's 151 Front Street West telecom facility, which is likely to improve upon market operations.

Depending on the unit of measure—whether volume, value or number of trades—TSX market share as of the end of May ranges from 63 to 68 percent. Alpha is the leading ATS, with about 19 to 23 percent of the market, followed by Chi-X Canada at 7 to 15 percent. MatchNow, Omega and Pure Trading have nominal market shares of less than 2 percent each.

Of the aforementioned developments, though, the order protection rule is likely to spark the most debate. Pure Trading points to its practice of protecting the full depth of the book, while Alpha Group CEO Jos Schmitt says it is only the first two or three levels of the book that matter in practice. Dark liquidity, already widespread in the US, is just starting to emerge, adding to the complications of liquidity in the Toronto markets. Such anonymous markets are the most efficient because they reduce information leakage, says Tal Cohen, CEO of Chi-X Canada.

As the effects of the order protection rule play out, Canadians will confront issues of trade attribution, transparency and broker preferencing, adds Cohen. The sure thing is that market centers will gain the option of how to implement the required full depth of book, according to Cohen, by either rejecting, canceling, routing or re-pricing orders, he says.