Alpha ATS Targets Maker-Taker Model with Lower ETF Fees

Following an announcement last month that it would do so, Toronto-based Alpha Group alternative trading system (ATS) has cut its fees for trading exchange-traded funds (ETFs), from 35 mils—or hundredths of a cent—per share to 25 mils per share.

The lower fee will also apply to all securities priced between CAN$1 ($1.01) and $5 ($5.03). Alpha's price cut is intended to compete with the maker-taker fee model of other Canadian venues, says Jos Schmitt, CEO of Alpha Group.

"The maker-taker fee structure induces market participants to be on the passive side of trades, as they are paid for doing so," he says. "It led a subset of market participants to develop trading strategies solely driven by fee rebates. ... The problem is that the spread reduction, allowed by the rebate, is not real but paid for by the retail broker, and ultimately the retail investor, through the active fee."

Ian Bandeen, vice chairman and CEO of CNSX Markets, the parent company of rival Canadian trading venue Pure Trading, says the Alpha price cut is not all it might seem. "Alpha is still doing a maker-taker [fee model]," says Bandeen. "All they have done is lower their levels for ETFs to match Pure. The ‘take' is 25 mils per share, but to ‘make' is 20 or 21 mils per share."

Schmitt acknowledges the 25 mils-per-share take figure and 21 mils-per-share make figure for a large majority of Canadian securities, and adds that Alpha's figures are far below the Toronto Stock Exchange (TSX), which is still at 35 mils per share for active trades (take) and 31 mils per share for passive trades (make).

Alpha has actually lost some high-frequency trading business because it deployed a fee cut rather than a rebate, according to Schmitt. "The fee changes ... led some of the high-frequency traders to move away from our market and others to strengthen their presence on our market, filling in the gaps left open by those who departed," he says. "Our market share in ETFs over the month of January and the redistribution of volume trades among market participants after the introduction of the new ETF fee structure is clear proof."

In addition, Alpha Trading recently introduced IntraSpread, an initiative allowing active retail flows to trade with other flows at lower cost while guaranteeing price improvement, also intended to curb the impact of the maker-taker fee model, says Schmitt.

IntraSpread is intended to be an internalization tool, says Bandeen. "The objective is to try to find a mechanism to shut out the US competition," he says. "They'd like very much to have the high-frequency traders come back home. They would like to create a facility where they could keep all the liquidity away from the general market for their exclusive benefit and take the lion's share of the bid-ask out for their own personal account, at the expense of the broader public interest. The regulators thus far have been pretty straightforward in saying no."

Schmitt says IntraSpread's objective is not internalization. "Our primary objective is the reduction of the cost of trading and improving the quality of execution," he says. "We developed a revised IntraSpread proposition that allows us to achieve the same objective without being accused of fostering internalization."