With Canada's No. 2 stock market, Alpha, closed much of Tuesday, where did the trading go? It went almost entirely to the incumbent Toronto Stock Exchange, a sign that without Alpha in the market the TSX would still be by far the dominant exchange.
A group of Canada's biggest banks started Alpha a few years ago to provide a competitor to the TSX, which they argued was able to keep fees high because it didn't face a significant challenger. Now, some of those same banks are part of a consortium that wants to buy the TSX owner, TMX Group Inc. , and combine it with Alpha. Canada's top competition regulator has signalled she has "serious concerns" with the idea.
One of the arguments from Maple's backers is that even with Alpha and TSX under the same ownership group, comprising more than 80 per cent of all equity trading in Canada, there are a lot of competing markets to which traders could shift their orders.
However, on Tuesday, without the competition from Alpha, TSX was by far the preferred option.
For November, Alpha was home to 22 per cent of Canadian stock trading, while TSX hosted 60 per cent of all trades.
On Tuesday, when Alpha shut down around 10:25 a.m. Toronto time, its market share fell to 4.85 per cent. That's down about 17 percentage points from where it had been on average in the prior month, according to figures from brokerage ITG Canada.
The trading that normally would happen on Alpha went almost exclusively to the TSX, which finished the day at almost 76 per cent. Of all the other half dozen markets ITG tracks, only Chi-X picked up noticeable share, and then only about 2 percentage points to 10.9 per cent.
Why did almost all the trading swing over to TSX? One answer is because in trading, the busiest markets tend to be the most popular. Buyers and sellers are most likely to find a match on a busy market, so that's where the orders go unless there's another reason to send them to a less active market. (Alpha over the years has benefitted from its backers at the big banks sending orders there whenever possible to ensure the new market they owned was competitive.) Some traders say trading tends to shift to TSX when Alpha is down, and vice versa, because the two markets have the most "natural" liquidity. They are home to a greater proportion of trading by investors who are buying for longer term purposes, rather than just flipping shares. Some of the smaller markets are dominated by orders from high frequency traders, who are more difficult to trade against profitably. In trader speak, the "fills" are better on TSX and Alpha -- which means the price at which the trade is done is more advantageous than on smaller markets.
"We find the flow on TSX and Alpha to be the most natural of all lit markets, which not surprisingly gives us the best fill quality," said Doug Clark, managing director of research at ITG Canada. "So when one is down the other is the next best thing."