Canadian Market Structure Changes Create Data Issues

Canadian markets are colliding over the question of what data will cost and what value data has, with the ongoing transformation of the country's market structure, according to executives of major Canadian investment firms and a trading venue at Incisive Media's Toronto Financial Information Summit 2011.

"As we've had multiple markets proliferate in Canada, the market data cost structure hasn't evolved," said Evan Young, head of electronic execution services at Scotia Capital. "We have to go and trade on all the available exchanges and ATSs [alternative trading systems], and we have to be able to process their data. Market data fees haven't necessarily adjusted to reflect the market share of various exchanges or any kind of split."

Aside from the long-time primary market, the Toronto Stock Exchange, the country now has Pure Trading, the CNSX, Omega, Alpha, Chi-X and the TSX Venture Exchange—which were recently joined by TSX's new TMX Select and the Instinet Canada Cross. Goldman Sachs plans to launch its own venue, Sigma X Canada, this year.

Canadian regulators could step in, and panelists debated whether they should, disputing whether regulatory involvement is needed to prevent anti-competitive behavior in providing data or whether smaller exchanges should have to prove themselves, when it comes to building their own data businesses.

"If a venue maintains a market data cost that is high, it puts a lot of pressure on the dealer community and other stakeholders," said Jos Schmitt, CEO of Alpha Group. "They are reluctant to expand access to market data. They will do it only in those limited areas where they need to, to make sure they comply with price protection regulations. Otherwise they will try to avoid it. That creates barriers for other marketplaces to develop."

Regulating market data could guarantee data revenue for smaller venues, according to Thomas Kalafatis, head of the prime brokerage services group at CIBC World Markets. "It might be more efficient to say if TMX Select or any ATS wants to start, for the first few percentage points of market share, they have to earn their place in the marketplace before participants are required to connect," he said. "At that point, we make decisions on market data. That's not necessarily going to get you the most efficient market. We need to create an environment where dealers, investors and participants—the buy side—can pressure exchanges to reduce market data fees."

The windows of time for integrating new venues into central limit order books have disappeared, according to Scotia Capital's Young, which means connections have become more complex, as is pulling together accurate market and reference data.

"The lack of ability to test across all the markets and have true Street-wide testing is a problem," said Young. "As more novel order types come in, with different behaviors, dark orders and the like, the complexity may be tested. We're dealing with one central limit order book fragmented across a bunch of venues. The action between markets and potential for unintended consequences is very real."