Investors and issuers are about to get a fourth option when it comes to trading, listing and market making in Canada. Alternative trading system Alpha is expected to shortly become the country’s fourth full-service equities exchange.
By becoming an exchange, Alpha can offer Canadian companies a listing alternative to the country’s other three exchanges—the Toronto Stock Exchange (TMX), TSX Venture Exchange and Canadian National Stock Exchange (CNSX). According to market estimates, TMX has 96 percent of the listings business while CNSX has the balance.
Alpha chief executive Jos Schmitt said becoming an exchange offers the new venue an opportunity to increase market share and profits. In particular, he sees the listings business as a prime way to attract new business.
He told Traders Magazine that the new Alpha exchange is on track to make its debut April 2. It has already gotten approval for its transformation from ATS to exchange from its primary regulator, the Ontario Securities Commission. It got the green light last Dec. 6. However, other regional regulators still need to approve it. Schmitt said he expects their approvals in time for its scheduled opening.
“With the OSC approving us, I don’t anticipate any issues from getting approvals from the other regional regulators,” Schmitt said. “We are now finalizing the practical preparations for the April launch.”
Alpha is no stranger to the Canadian equities space. After five years, it has established a presence in the Great North. Alpha operates its namesake “lit” alternative trading system and a dark pool, IntraSpread, which was launched last June. According to Schmitt, the lit venue’s average trade size is between 400 and 500 shares while the dark pool’s trade size is roughly double – between 900 and 1,000 shares.
Overall, Alpha captures about 20 percent of the Canadian equity market, while TMX Group has 67 percent, according to the latest figures from the Investment Industry Regulatory Organization of Canada. By Canadian law, any ATS that garners 20 percent of total volume must file to become an exchange.
Alpha, backed by nine of Canada’s leading firms, BMO Nesbitt Burns, Canaccord Capital, CIBC World Markets, Canada Pension Plan Investment Board, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotia Capital and TD Securities, hopes to capitalize on its relationship with the investment banks it counts as its partners.
“Now that we are established as a successful trading venue with the ATS, we are ready to move into other spaces,” Schmitt said. As an exchange, he added, Alpha plans to cultivate its own listings and market making businesses on top of growing its trading activities.”
And to differentiate itself from its competitors, Alpha plans to focus on a subset of issuers and securities rather than go head to head with the TMX across all issuers.
“In terms of listing, we do not want to be everything to everyone,” Schmitt said.
While not divulging details ahead of the opening in one month, Schmitt did say Alpha plans to offer a new approach to listing fees and costs as well as to market making for companies who choose to list on the exchange. Market making, he added, is “very critical” for a new listed company.
But that might not be enough for Alpha to wrestle listings business away from goliath TMX. Renee Colyer, chief executive at Forefactor, a Canadian research firm, told Traders Magazine the Toronto’s listings business has strong global brand name recognition, as upwards of 70 percent of Canadian companies trade there. This makes TMX the exchange of choice for issuers because it gives them more exposure to investors. Given this, she said, Alpha has a tough nut to crack.
“If you’re a company, where do you list?” Colyer asked. “The TMX has experience, knows the needs of issuers, has a mature infrastructure and a team dedicated to listed companies. They know what they are doing.”
But she added that the companies that back Alpha are some of the largest and could use their wide distribution networks to promote new issuers to their retail and institutional clients.
“With several banks behind the exchange, then you can offer these issuers a lot of programs and liquidity,” she said. “And in Canada, the banks provide all the liquidity.”
Alpha might have another ace up its sleeve. Doug Clark, head of market structure at ITG Canada, told Traders Magazine that with Alpha becoming an exchange it can have registered traders, akin to U.S. market makers, in both Alpha-listed stocks and those on the TMX. Registered traders are responsible for guaranteeing minimum size trades for lower priced stocks.
“To be a registered trader on TMX you have to be a registered broker-dealer, and that isn’t the case with Alpha as I understand it,” Clark said. “Then they can offer the RTs preferential pricing and draw in that business, which could include high-frequency traders.”
Several sources, including Clark, said Alpha has been mum on any pricing details.
“Our take is that Alpha is going after the HFT business,” Clark said.
But James Duncan, head of international trading in Toronto at Canaccord Genuity, said Alpha’s entrance is based on the prospects of growing a listings business as the registered trader/market making business is not very profitable in Canada.
“Registered traders are not active market makers like in the U.S.,” he said. “RTs here trade virtually without transaction fees but without the onerous constraints of U.S. market makers. It’s about the listings, and one more place or choice for companies to list is a good thing.”
