Battle lines drawn as Nasdaq readies Canadian ‘dark pool’ plan

Share

Nasdaq Inc. is confident it can make a dent in Canada's "dark pool" stock trading market, but its biggest competitor has criticized its plans as ill-conceived.

Late last month, the Ontario Securities Commission published Nasdaq's proposal to launch a standalone dark pool Canada in September. The industry has until May 30 to make public comments on the matter.

"As a competitor, we're kind of happy to see that they've done a pretty amateurish job setting this up," said Doug Clark, managing director and head of research with ITG Canada Corp., the owner of Match Now, Canada's largest dark pool.

"It kind of looks like it was something that was slapped together on a Friday afternoon," he added.

Mr. Clark pointed to number of examples of what he characterized as potential issues with Nasdaq's application for a dark pool, including its proposed opening hours and the inclusion of certain order types such as "sweep orders," which he maintains were not well thought out.

Asked to respond to the criticisms, Joe Christinat, a spokesman for Nasdaq, declined to address them directly.

He said the company sees an opportunity in Canada.

"Trading on dark pools has been growing over the past 18 months," Mr. Christinat wrote in an e-mail. "We also believe there is a growing demand for competition and choice when it comes to venues that provide price improvement."

Dark pools, sometimes called the "upstairs market," accounted for about 5.5 per cent of trading by value in the first quarter in Canada, according to the Investment Industry Regulatory Organization of Canada.

Unlike the traditional "lit" market, buyers and sellers in a dark pool typically trade with each other anonymously. The buy side sometimes uses these opaque markets to unload large blocks of stock without tipping off other investors in the hope of finding a better price. Some Canadian dark pools, such as Liquidnet Canada Inc., deal exclusively with institutional investors. Others, such as Match Now, which accounts for more than nine in 10 dark order trades in Canada, also cater to retail investors and smaller orders. This is the niche that Nasdaq appears to be zeroing in on.

Despite fighting talk from the owner of Match Now, one industry veteran said Nasdaq has a real shot at eating into its dominance in Canada.

"I think there clearly is an an opportunity for Nasdaq to compete with [Match Now]," said Robert Young, former chief executive officer of Liquidnet Canada.

"Had they [Nasdaq] done it a year ago, before ITG had one of the larger dark pool embarrassments that cost their CEO his job … they probably would have garnered a whole lot of market share," he added.

In August of last year, ITG, which is headquartered in the United States, was fined $20.3-million (U.S.) after the U.S. Securities and Exchange Commission found that the brokerage had used confidential information gleaned from its dark pool for trading purposes. Robert Gasser, its U.S. chief executive officer, resigned over the affair.

Although Match Now's Canadian market share dropped somewhat in the aftermath of the scandal in the U.S., Mr. Clark says it has recovered.

"At this point, most of our clients globally are back."

In February, Nasdaq closed the acquisition of Chi-X Canada, which gives it about 20-per-cent market share in equities trading, and makes it the No. 2 player in the market after TMX Group Inc., the operator of the Toronto Stock Exchange and the TSX Venture Exchange. Nasdaq inherited two "lit" alternative trading platforms, formerly operated by Chi-X, and rebranded them Nasdaq CX and Nasdaq CX2. The new dark pool, if approved by the regulator, will be called Nasdaq CXD.

Nasdaq's longer game plan in Canada is widely expected to be the eventual launch of a fully fledged stock exchange that would permit it to list companies and compete against the TMX Group, which has a stranglehold on listings.