Toronto Stock Exchange.Sami Siva
Facing fierce competition, the owner of the Toronto Stock Exchange has elbowed its way into the alternative trading market by filing paperwork for a new trading system dubbed TMX Select.
Should its application be approved by regulators, TMX Group Inc., will become the first Canadian company to run both a registered exchange and an alternative trading platform. Select is expected to launch in the second quarter of 2011.
The filing on Monday signals that TMX feels the need to reposition itself for the future. Over the past two years, alternative trading systems such as Alpha, owned by a group of Canadian banks, and Chi-X, run by global trading firm Instinet, have grown in popularity as they vie to topple the dominant TSX. About 30 to 35 per cent of trading volume now moves through alternative platforms, according to Iress, which tracks trade execution.
Select is TMX's second attempt at launching an alternative trading facility. In early 2008 the group announced plans to start a platform known as Photon but never got it off the ground. The revamped plans suggest TMX decided it can't wait any longer.
"The Canadian marketplace is evolving very, very quickly," said Kevan Cowan, president of TSX markets at TMX. With the new trading platform, "one of the sources of [trading]liquidity will be the repatriation of order flow that has moved to our competition."
While the TSX allows trading in "odd lots" of fewer than 100 shares, Select will be limited to "board" lots of 100 shares.
Select will also offer what is known as price-time priority, meaning trades will be executed in sequence based on price. If two orders have the same price, whichever was entered first will be executed ahead of the other. That differs from the TSX, which allows brokers to jump the queue if one of them has matching buy and sell orders in its system.
The price-time feature works to the advantage of smaller brokers that may have fewer orders than larger rivals, and puts Select in direct competition with Chi-X, which had a 6.5 per cent market share in September, and offers the same price-time benefit. (Alpha, the second largest player with a 20 per cent market share, allows dealers to jump the queue.)
By launching its own alternative trading system, TMX opens up a new source of revenue. It will earn large fees both for listing companies on the TSX and TSX Venture Exchange, as well as reaping trading commissions when shares are traded either on its current exchanges or on the new Select platform. The other Canadian alternative trading systems do not earn listing fees because they all trade stocks already listed on the TSX and the TSX Venture Exchange.
To distinguish themselves, the alternative trading systems now in operation typically compete on price per trade. (TMX said Select will announce its prices in a few months.) Beyond that, the alternative platforms have to focus on niche features, such as faster trading engines. Mike Bignell, president and chief compliance officer of Omega ATS, another alternative competitor, said the TSX doesn't appear to be offering up something that doesn't already exist. "New [alternative trading systems]are supposed to bring innovation," he said.
TMX has announced that Select will have extended trading hours, but Mr. Bignell doesn't see that as sufficient reason to launch a new platform.
Editor's note: An earlier online version of this story incorrectly stated that only some brokers may jump the order queue on the TSX and TSX Venture Exchange, and incorrectly indicated the pricing for stocks trading on the Select trading platform. This online version has been corrected.
Tim Kiladze