In Canada, where competition against the dominant Toronto Stock Exchange has achieved a measure of success only in the last quarter, a small alternative trading system called Omega ATS is seeking to rock the boat with radical pricing. Omega is currently Canada’s smallest displayed market.
Starting in July, Omega will execute all transactions for 7 cents apiece. In lieu of the customary per-share pricing, the ATS will charge a flat fee per executed order. An order for 100 shares or 1,000 shares will cost 7 cents for the liquidity taker. The liquidity provider will pay nothing, and will also get no rebate. Omega’s current pricing is a 25-cent fee per 100 shares for liquidity takers and a 24-cent credit for liquidity providers for stocks $1 or more.
“What we bring is a low-cost alternative model,” said Greg King, chief operating officer of Omega. “Other marketplaces in Canada have significant payrolls and infrastructures to support their trading. Our message is that trade matching is a black box now. Electronic order matching is a commodity.”
Market centers comparable to ECNs in the U.S. have cropped up in Canada over the last 18 months in response to regulatory changes designed to boost competition. Later this year, the Canadian Securities Administrators, the nation’s team of provincial regulators, is expected to adopt a trade-through rule that would protect the best prices. More flow would thus go to smaller venues if they have the best prices. (Canada’s trade-through rule, unlike the U.S.’s, will protect the full depth of book, rather than just the top of book at each displayed market.)
The Toronto exchange is Canada’s main market center. In value traded, the TSX represented 90.6 percent of the market in the first quarter of this year, with Chi-X Canada and dealer-owned Alpha Trading Systems, in their best showing yet, capturing more than 3 percent apiece. (In volume traded, the TSX had 73.4 percent of the market, with TSX Venture Exchange, which lists small- and micro-cap stocks, at 19.6 percent.)
The TSX has maker-taker pricing. For stocks $1 and over, the TSX charges its biggest customers 33 cents per 100 shares and credits liquidity providers 31 cents. Other customers pay 37 cents to take liquidity and get a 29-cent rebate for providing liquidity. For stocks under $1, the best pricing is a 6-cent take fee and 3-cent credit. Others pay 8 cents for liquidity and get 1 cent for passive orders.
For its part, Omega had less than 0.5 percent of the domestic market share in both value and volume traded last quarter. But the firm hopes its new pricing will change that by attracting flow. The pricing, announced last Thursday, applies to all stocks, including stocks under $1.
While Omega’s current pricing for stocks $1 or more is a 24/25 maker-taker model, for lower-priced stocks the firm charges takers 50 cents for the entire order, already undercutting bigger markets for large trades. It moved to this pricing last month, from a 36/39-cent maker-taker model.
To keep costs down, Omega will offer a bare-bones system rather than a full-service market center with market-on-open and market-on-close orders and other execution services. It will meet its regulatory requirements but currently does not plan to route orders out to other markets.
In these respects, Omega’s King said, his ATS is pursuing a different path than the other market centers that have launched in Canada since 2007. Omega is the fourth displayed-market ATS in Canada, after Pure Trading, Chi-X and Alpha. Perimeter Markets, where King previously worked, shuttered its equities crossing platform in February.
“We are definitely the underdog,” King said of Omega. “Pure Trading, as the first alternative marketplace, had regulatory support [that encouraged brokers to connect to the platform], while Chi-X is a global franchise. Alpha has the six bank brokers supporting them.”
James Kang, an analyst at research firm Aite Group, notes that Omega’s gambit is to focus on liquidity takers rather than providers. “It is almost a backwards approach,” he wrote in a statement about Omega’s pricing. “Rebates are designed to entice liquidity providers, but in this case, Omega is targeting the liquidity takers and making Omega an execution venue where the takers gather, [and therefore] a place the providers will want to be. Whether this is a good move is yet to be seen…unconventional approaches are not always set to fail.”
Omega’s King points out that focusing on rebate-seekers by providing high credits, which most of the Canadian markets (including Omega) currently do, is misguided. “That’s the U.S. model,” he said. “But when you look at Canada, Europe or elsewhere, the U.S. is really the world anomaly. The U.S. markets are liquid and can support that, but other markets are nowhere near as broad and nowhere near as deep. Here, brokers just want liquidity.”
Omega’s largest shareholders are MarLar Group in Montvale, N.J., and BRMS Holdings, which owns Swift Trade, a large day-trading firm based in Toronto. One of MarLar’s owners is Mark Shefts, who also owns Domestic Securities, which sold its Attain ECN in the U.S. to Knight Capital Group in 2005. That ECN has now been transformed into Direct Edge, a separate company seeking exchange status in the U.S. (Peter Beck, a major shareholder of BRMS, is launching a trading facility in Europe called Quote MTF later this year.)
Omega launched in December 2007 with four subscribers. It now has 50, out of a core universe of about 100 firms, King said. Those connected include three of Canada’s half-dozen major banks and broker-dealers, with another one in the wings getting set to connect. The three big dealers already connected are CIBC World Markets, Scotia Capital and National Bank Financial.
Getting connections in Canada, which has a dealer-based market, has proved to be a lengthy process. King said he learned the importance of getting connections while at Perimeter. Although Canadian regulators are working on a trade-through rule, broker-dealers are currently expected to take “reasonable steps” to connect to visible marketplaces, King said. But reasonable means that “timelines start to get stretched, and getting the connections is slow,” he said.
As a result, Omega’s new pricing schedule won’t go into effect until July 1. The market center opted for a long lead time, King said, to give firms plenty of time to connect.
Omega also learned a lesson from an earlier pricing change in April. After announcing that change in February, King said, a number of clients noted that that they were reluctant to use the system without attribution. Attribution refers to the identification on the screen of the participant. Canada, King said, maintains an upstairs marketplace mentality that encourages firms to display their identity so customers know they’re in the market in a particular name. Omega added attribution in late March.
