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Bank towers are reflected in a window at the financial district of Toronto, on Wednesday, July 18, 2012.Brent Lewin/Bloomberg

Canadian securities regulators are reviewing whether the nation's largest brokers are increasingly routing equity trades to U.S. dealers to save costs.

The Ontario Securities Commission, along with the Investment Industry Regulatory Organization of Canada, are examining the issue, said Susan Greenglass, director of market regulation at the OSC.

"We've asked questions of some dealers and we're in the process of gathering information," she said in a phone interview from Toronto. "Cost has been an issue that has been raised with us and we expect to get more information about that."

Regulators began their research after "a variety of market participants" raised the matter amid concerns the practice is siphoning business from Canadian markets, she said. TMX Group Ltd., operator of the country's largest exchange, has seen its Canadian market share slump and is now at risk of losing trades to the U.S. as well.

"I'd emphasize what our concern is, about the longer term impact on the market if order flow is routed away from the Canadian market on a broad basis," Greenglass said.

Canadian brokers are taking their business to the U.S. because they get paid rebates they wouldn't otherwise receive domestically, said Robert Young, chief executive officer at Liquidnet Canada, a Canadian marketplace that facilitates trading between buyers and sellers.

"The first time they get that check back they're gob– smacked," he said in a phone interview.

Diverting Flow

According to Young, Canadian brokers are prohibited from pairing orders themselves away from exchanges as is allowed in the U.S. Directing some of their customer flows to the U.S., where firms known as wholesalers are permitted to match trades and pay rebates, is a way to save money.

The regulators will most likely issue guidance recommending against diverting flow to the U.S., Young said. Phone calls to the nation's biggest banks would be enough to curtail the practice because they're the biggest broker-dealers, he said.

Royal Bank of Canada does not routinely route retail stock orders of dually listed Canadian companies to U.S. wholesale broker-dealers for execution, said spokeswoman Claire Holland.

For clients with U.S. dollar-denominated accounts, Royal Bank will route those orders to a U.S. dealer to avoid foreign exchange charges, she said.

Toronto-Dominion Bank "doesn't reroute Canadian retail orders to U.S. brokers," spokeswoman Alison Ford said.

Representatives for Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce declined to comment.

TMX Changes

TMX, operator of the Toronto Stock Exchange, in October unveiled changes to its own platforms it said were meant to keep flows from exiting Canada. This includes the introduction of rebates for "active flow" from investors into its Alpha exchange, the company said in a release.

"If we see flow migrating to the United States that's not good for Canadian equity markets," Kevan Cowan, president of TSX Markets and group head of equities at TMX, said in an Oct. 23 interview. The company, whose shares have dropped 12 per cent from a peak of C$60.69 this year, appointed Lou Eccleston to begin as its new CEO Nov. 3

Carolyn Quick, a spokeswoman at TMX, said Cowan wasn't available for an interview.

TMX's four platforms, including the Toronto Stock Exchange, Venture exchange, Alpha and TMX Select, owned about 74 per cent Canadian market share by volume in the third quarter, according to data from IIROC.

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