TMX Group, the Canadian exchange operator and infrastructure provider, has introduced a new trading platform in its home market which will serve as a launchpad for its global ambitions.
In November this year TMX Group announced the launch of a new Canadian trading platform consisting of two order books, Alpha-X and Alpha DRK.
Rizwan Awan, president of equity trading & head of TMX Markets, products and services, told Markets Media: “It is not every day that new platforms are built. For our global strategy and vision, we want to be the marketplace of choice for execution quality.”
TMX wants to maintain and defend its share of two thirds of the Canadian market, but to grow further the group has to look beyond its home market according to Awan.
“The new venue is a launching pad for what we are going to do elsewhere and we are going through a filing process for an ATS [alternative trading system] in the US,” he added.
Awan admitted there are a lot of existing ATSs in the US but he argues that very few that go after execution quality. He gave the example of IEX, which began as an ATS in the US and is now an exchange, and said IEX has been the poster child for execution quality for about 10 years.
Other ATSs have launched more recently as there has been more scrutiny on execution quality in the last few years. Awan said: “The space represents between 4% and 6% of the US market today and we expect that to continue to grow.”
As TMX looks to expand in the US, it has faced increased competition in Canada following the entrance of Cboe Global Markets, the US exchange operator.
In 2022 Cboe completed the acquisition of NEO, a fintech which included the fully registered Canadian securities exchange, NEO Exchange. Previously in Canada, Cboe had purchased MATCHNow, the ATS, in 2020 and also launched Cboe BIDS Canada, an equities block trading venue in February 2022. Cboe reported that its Canadian equities market share rose to 15.2% in the third quarter of this year, up from 12.2% in the same period of 2022.
New platform
The Canadian market is reducing its from two business days after a trade, T+2, to T+1 on 27 May 2024, one day before the US implements T+1. As a result, TMX knew IT had a very small window of opportunity to launch the new platform.
Awan said: “I am proud of the teams that were able to get this up and running before everyone freezes their code towards year end. The next window of opportunity would have been late January, which could potentially have pushed us out to after T+1 and into mid-2024.”
The two new equities order books, Alpha-X and Alpha DRK, aim to provide high-quality execution for natural order flow, limit adverse selection resulting from natural speed advantages in the trading ecosystem, and improve the overall trading experience for all participants according to TMX.
“We wanted to give participants a choice between the lit and dark books and both have features that get to the heart of improving execution quality,” added Awan. “We deliberately introduced latency into the platform through the concept of speed bumps which hold up active orders for three milliseconds and protect participants against adverse selection.”
Alpha-X is a visible order book that has all of the same order types and trading functionalities currently available on TSX Alpha Exchange, and features the new Smart Limit order type.
The new Smart Limit order has a decay signal from TMX’s proprietary model which essentially listens to more than 300 parameters in real time across all the markets in Canada according to Awan. If the signal predicts there is a high probability that the quote will decay in the next few milliseconds, it generates a signal to back out the Smart Limit order so it does not get run over.
Alpha DRK is a fully dark order book with a suite of pegged (Primary, Market, Minimum Price Improvement, Midpoint) market and limit order types, and has the new Smart Peg order type. Awan said the new standalone dark book has a Smart Peg order which optimises the price for a transaction within the quoted spread.
He continued that the new platform has received “amazing” feedback and the vast majority of clients are already kicking the tires. Although it will take a few months to build up data, Awan said the early signs are extremely positive.
“There is only going to be more, not less, data going forward and there will be more quantitatively driven workflows,” Awan added. “It all points in one direction – that people are going to get more discerning as markets get more efficient over time.”
