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Cantor Fitzgerald Canada has hopped into the highly competitive world of electronic trading in Canada. The brokerage will now go head to head against global heavyweights like Morgan Stanley, JPMorgan Chase & Co., and Goldman Sachs Group Inc., as well as the brokerage arms of the big six Canadian banks, mid-tier companies like GMP Capital Trust and Cormark Securities Inc. and niche electronic firms like ITG and Instinet. That's already more brokerages than you can shake a stick at. Can Cantor establish a foothold in such a fiercely competitive market? It can't afford not to.
Electronic trading, or direct market access (DMA), is growing at a breakneck pace. The percentage of Canadian equity trading executed electronically for institutional clients was 24 per cent in the second quarter of 2014, up from 16 per cent in the same period in 2013, according to Greenwich Associates.
"The growth of electronic trading and direct market access is well documented," said Laurence Rose, chief executive of Cantor Fitzgerald Canada.
When a money manager on Bay Street wants to execute a trade for a client they must go through a registered market dealer, such as Credit Suisse, Instinet or BMO Capital Markets. At that point they have two choices: Deal with a human, or a computer. If you go the human route, you call your broker and they will do the work of getting you the best price. This is called "high touch" and is the de facto stock trading method for large blocks of shares, illiquid issues or for a bought deal. Anytime a trade demands nuance, judgement and discretion, you want a human involved.
The other option for money managers is to go the electronic route. Traders still have to use a registered market dealer, but in this case they avail themselves of whatever computerized trading system the registered market deal offers. The experience is similar to a retail investor using an online discount broker to execute a trade. Because a human isn't involved, this type of trade is deemed "low touch." Electronic trading is often used for the no brainer, quick and dirty trade, one that won't move the market, e.g. a market order for 10 thousand shares in Bank of America.
Using algorithms (a.k.a. "algos") allows traders to make more sophisticated moves like "time weighted average price" or "time weighted average volume" trades. There are algorithms that will execute a trade based on a minimum (the trader sets the minimum) amount of shares being offered. Using "interlisted" algos, a trader can peruse Canadian and U.S. exchanges and figure out which market a trade should be executed in, based on market price and exchange rate, in real time.
It is in this type of trading where Cantor believes it has an edge. "Our mandate is to provide clients with what we feel are the best algos available," said Cantor's new hire, Peter Gombocz, head of electronic and program sales and trading at Cantor. He knows a thing or two about algos. Before joining Cantor, he put in a two and a half year stint at Macquarie Capital, as senior vice president, DMA Trading.
Doug Clark, managing director, research with ITG Canada Corp, whose company will be competing against Mr. Gombocz's firm, says Cantor is known mainly in the U.S. for its prowess in trading bonds electronically, and not stocks. But he believes the company can become a player in Canada over time, thanks to its well established brand in the U.S., and its relationships with institutional clients.
Still, Mr. Gombocz is under no illusions about whether Cantor will have its work cut out for it. "The landscape is certainly competitive," he said.
According to second quarter data, ITG was the number one firm on Bay Street in "market penetration." for electronic trading. "Penetration is scored in two ways – what percentage of firms surveyed use you, and what percentage name you as their number one," said Mr. Clark. (Greenwich doesn't break down market share by firm for electronic trading.)
Diana Avigdor, head of trading at Barometer Capital Management in Toronto has 20 years of experience in trading stocks. She says of the 40 odd brokerages on Bay Street, there are only about five that are "excellent" in electronic trading. Ms. Avigdor defines excellent firms as "those that are smart, have invested in technology, have better algos and better user experiences."
What constitutes a good user experience? "I like simplicity. Complexity and having too many features is bad. A brokerage might say I have 50 algos. I don't need 50 algos. I need maybe four.
But having good algos and an easy to use electronic interface aren't the only factors that determine whether a brokerage wins business in electronic trading. Mr. Clark says firms that offer a full suite of services (full service brokers) like investment banking, equity research and electronic trading will sometimes have the edge, not because their technology is the best, but because the client wants to ensure the next time there's a hot IPO, they will have a better shot at being allocated shares. Often times, it's about cultivating relationships.
Ms. Avigdor explains with a hypothetical: "Let's say I really hate their full service desk, but I need to pay them, because they've given me some great research, so I'll do some DMA [electronic trading] with them." Sometimes you just need to do the guy a solid.
In a world that is increasingly anonymous and electronic, maybe there's still a place for subjectivity, judgement and the human touch after all.
Niall McGee