TMX Group, operator of the Toronto Stock Exchange, has announced plans to launch a mutual fund trading platform in the second quarter of 2016.Aaron Vincent Elkaim/The Canadian Press
The way Canadian mutual funds are bought and sold will soon be turned on its head. Two companies are working on stock-exchange-like platforms that are expected to go live soon.
On Monday TMX Group Ltd., operator of the Toronto Stock Exchange, announced plans to launch a mutual fund trading platform in the second quarter of next year. Last week, Aequitas Innovations Inc., which owns the Aequitas Neo Exchange, said it plans to have a similar platform in place in the first quarter. If the concept takes off, it will mean a new source of trading revenue for TMX and Aequitas in a difficult market.
"It is really being able to trade mutual funds like you would trade listed securities," Jos Schmitt, chief executive officer of Aequitas Innovations, said in an interview.
Aequitas is licensing technology already in use by Invesco Canada, a seller of actively managed mutual funds. Invesco has committed to using Aequitas's trading platform, but it is the only taker so far.
TMX doesn't have any firm commitments, but 18 mutual fund companies have expressed interest in using its platform, including AGF Management Ltd., BMO Global Asset Management and Franklin Templeton Investments.
Deana Djurdjevic, senior vice-president of equities trading with TMX, said in an interview that the company's new platform should be able to process transactions with increased efficiency.
Currently, investment advisers must use Fundserv Inc.'s system to settle mutual fund trades, which she says is complicated and uses overly "granular" accounting. The difficulty of dealing with Fundserv, she said, has resulted in some investment advisers directing clients away from mutual funds and into individual securities and exchange-traded funds (ETFs) instead. (ETFs and stocks are traded on stock exchanges and do not entail as much accounting red tape for advisers.)
The new platform should ultimately bring down costs for the entire mutual fund industry – and eventually, investors.
"This [new trading platform] should allow for fund manufacturers to manufacture these funds with lower fees," she said.
Mutual funds traded on the new platforms are not expected to carry embedded trailer fees, which means that traditional investment advisers who get paid based on trailers likely won't have a strong incentive for using the new platforms.
Fee-based planners however – who get paid by the hour, or based on the entire assets under management – are much more likely to be incentivized to use the new platforms. (Currently, investors can only dodge trailers by either buying an F-series mutual fund through a fee-based financial planner, or purchasing the D series of a mutual fund – if it is available – through a discount brokerage.)
The absence of a trailing fee in their trading platform – and the impediment to growth that may represent – could become a moot issue over time for TMX and Aequitas.
The Canadian Securities Administrators (CSA), an umbrella group of all of the securities regulators, is exploring whether to ban trailer fees outright. A decision is expected next year.
The mutual fund industry has been under relentless pressure to cut fees. The popularity of exchange-traded funds (ETFs), which typically charge significantly lower fees than mutual funds, has driven costs lower but steep disparities between the two products persist.
Niall McGee