Despite the failed merger of the Toronto Stock Exchange and the London Stock Exchange, a new era in equities with a greater reliance on technology is still expected to take hold in Canada.
U.S. vendors of electronic trading see opportunities as a result of the changing market structure there. As more alternative venues spring up, traders must deal with the expected increase in fragmentation with more electronic trading tools. Essentially, what has transpired in the U.S. will see another iteration in Canada.
Venue growth in Canada was prompted by a regulatory changes in 2001; National Instrument 21-101 Market Place Operations and NI 23-101Trading Rules — known as the "ATS rules."
Canada main trading exchange is the Toronto, which has nearly 60 percent of all trading volume. But new alternatives such as TMX Select, Goldman Sachs and others are expected to pose challenges to current market leaders when they launch. Liquidnet, ITG and Instinet are the only dark pool operators to date.
The expectation is that more venues will force the sellside to hook up to these new trading outlets. Also, brokers will be forced to either upgrade their existing systems or in the case of smaller sellside firms, get the technology to remain competitive.
Sang Lee, a managing partner at the consultancy Aite Group, said trading solution providers can expect to see demand for their services from all sides — both the buyside and sellside.
"The Canadian market is going through a tremendous amount of market structure changes — from fragmentation, adoption of more sophisticated strategies and algorithms to smart order routers," Lee said. Couple these technological changes with the growing presence of HFTs and other types of traders, he added, has created a demand for innovation and more product providers.
Vendors are aware that the Canadian equity market is moving towards more algorithms, smart order routers and new trading venues. As more alternative trading venues spring up such as Goldman Sachs’ Sigma X and TMX Select, HFTs are becoming a bigger part of the trading landscape, so the need for low-latency solutions is growing, said Mark Skalabrin, the chief executive of Redline Trading, a U.S. provider of low-latency products.
Redline specializes in providing algorithms and smart order routers to both the buyside and sellside. They see the opportunity — and it is now.
"We’re being drawn to Canada by the buyside," Redline chief executive Skalabrin said. His firm is targeting prop traders at Canadian banks and high-frequency traders also. "This electronic market is maturing and becoming attractive to people who engage in low-latency trading."
Prop traders at Canadian banks and the buysiders he’s spoken with are looking at smart order routers and crossing engines, as well as algorithms that will help them keep pace in the market.
"Canada is an evolving market and on a technology trajectory to be very similar to the U.S.," Skalabrin said. "There’s a lot more vendor competition now here- it’s a place where companies like us are going to focus on more for the next couple of years."
Aite’s Lee agrees. "Overall, Canada is ripe for vendors to come in. Most are there already or should be there."
However given the smaller size of the Canadian equities market, roughly one-tenth the size of its U.S. cousin, Lee said the window of opportunity could be shorter and smaller when compared to the U.S., but the opportunities are there."
One market structure pro said that despite the Canadian market’s smaller relative size and fewer brokers compared to the U.S., there is money to be made there.
"There are opportunities, but they’re not groundbreaking just because the size of that market," he said. "I think the reason a vendor looks at Canada is that it does have a similar market structure. It’s definitely worth looking into."
In addition, there’s a common language and it’s close, making the Canada good place to expand, he added.
And it has been profitable for the U.S. bulge brackets, which have been doing business in Canada for some time now. ITG, Credit Suisse and Morgan Stanley have been offering algos in Canada since 2003, but only more recently has algo usage picked up due to the rise in electronic trading.
Indeed, firms like Mantara, a U.S.-based provider of HFT and ultra-low latency direct market access, are making the move across the border. It recently announced it was opening a Canadian office focused on high-frequency trading. Mantara is offering pre-trade risk controls and direct market access to the sellside in Canada.
"We are excited to be able to support the growing needs of Canada’s HFT community by providing a direct presence in its backyard," Michael Chin, president and chief executive of Mantara, said in a press release.
According to Aite’s Lee, the HFTs aren’t the only ones who have unmet needs. The buysiders are also in the market for either new automated trading solutions or to upgrade existing ones. Now with the emergence of alternate venues and dark pools as well as faster trading speeds, some on the buyside need improved OMSs, EMSs and smart order routers.
"When they traded on one venue, it was easy to catch a mistake, especially when it took minutes or seconds to do a trade," Lee said. "Now in the era of the millisecond and fragmentation, you need improved systems on both the front office and the middle office."
Order management system provider Linedata has taken note of this need and recently opened a new office in Toronto to meet these needs and capture its share of the Canadian pie.
And the stakes are high for the vendors who expand north. The Canadian sellside, while smaller than the U.S., is mostly controlled by a handful of large banks and sellside firms. Landing one of them as a client could make the trip worthwhile.
"If you get one of those guys as your client," commented one longtime observer of Canada, "you get a good chunk of the market."
