May the Best Venue Win

michael-shashoua-waters

The Labor Day holiday in the US and the end of summer leave me wishing there were time for a few more beach trips. But duty calls—namely to deliver this column to you in Rob Daly's stead this week and next.

While many on both sides of the US–Canada border may have been at the beach last month, the Investment Industry Regulatory Organization of Canada (IIROC) on Aug. 13 asked major brokerages to explain their participation in the Momentum Initiative, a program of the Alpha Group alternative trading system (ATS), the largest such competitor of the Toronto Stock Exchange (TSX). Alpha's initiative asked its backers, which include the major Canadian banks, to switch orders from the TSX to Alpha to make Alpha a busier market.

Orders switched to Alpha at the market open, in particular, drew the IIROC's attention since if those orders are filled at a worse price than what is available on the TSX, participants may be put at a disadvantage.

Alpha CEO Jos Schmitt says he is baffled by IIROC's singling out of the Momentum Initiative. "Is there anything specifically that needs to be done around the fact that [the marketplace] has multiple prices?" he says. "The Momentum Initiative tries to push liquidity to Alpha, but always with full respect for best prices and best execution principles. The Momentum Initiative directs orders to one place versus another. That is driven fundamentally by fees, service and quality of execution. Alpha scores extremely high in these areas."

So far, IIROC's action on the Momentum Initiative has been confined to its inquiry to brokers. Some Canadian brokers say the rules for pre-market routing of orders leave room for interpretation. Even if that isn't the case, the contention that the Momentum Initiative subverts free and fair competition doesn't hold water. If Alpha's competitors have a problem with it, all they have to do is come up with better service, lower fees and more desirable prices for the securities themselves.

"It's not very complex to understand what the benefit is of directing orders to Alpha,” Schmitt acknowledges. “But that will always be subject to two main conditions: best price and best execution." He says he has been asking for guidance from regulators on the multiple opening prices issue since summer 2009.

So even as the weather cools, debate over fair market open pricing in Canadian markets is sure to heat up.

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