Canadian brokers are the latest to embrace the fashion, popular among their counterparts in the US and Europe, of clubbing together to create alternative trading venues.
In a move that strikes a number of parallels with Project Turquoise in Europe, seven of Canada’s largest broker dealers announced this May that they were working together to launch an alternative trading system, dubbed Project Alpha. The seven firms behind the initiative are BMO Capital Markets, Canacord Capital Corporation, CIBC World Markets, National Bank Financial, RBC Capital Markets, Scotia Capital and TD Securities.
Project Alpha is the latest would-be challenger to the Toronto Stock Exchange (TSX) to set up shop in Canada, along with ICX, an ATS planned by Instinet, and Pure Trading, a rival exchange that opened its doors 18 months ago.
"The Canadian market has woken up to the fact that it needs to improve its efficiency and liquidity in order to stay up to par with its competitors globally," says Jos Schmitt, CEO of Project Alpha. "By bringing competition to the market we hope to achieve this."
Although the regulatory framework for competition has been in place since 2001, so far little has changed.
"The seven dealers sponsoring this initiative got together because they felt that they had to do something themselves if they wanted anything to happen," says Schmitt.
Development of Project Alpha is being overseen by Capco, a consultancy that has had experience developing a number of marketplaces worldwide. The ATS plans to launch next year and to include smart order routing to other venues.
Instinet hopes to launch its ICX platform by the end of 2007.
"The Canadian market is developing as more global investors have been drawn to the market by the booming commodities cycle," says Tal Cohen, senior vice-president at Instinet. "Foreign investors have traditionally been somewhat mystified by the market because it is dominated by local players and because until recently it didn’t support Fix.
"We currently operate seven alternative marketplaces around the world today, four in the US, two in Asia and one in Europe, so we have a lot of experience and knowledge about running market centres," says Cohen. "We think that by bringing our state-of-the-art global matching engine and tailoring it to local needs we can lower the overall cost of trading, improve the efficiency of the market and demystify things a bit."
The new challengers hope that their combination of lower prices, lower latency and more innovative order types will help them attract liquidity. They will be helped by a best execution requirement in Canada that will require broker dealers to connect to new liquidity pools in order to ensure that they are getting the best price.
Crossing networks, such as ITG’s Posit, which launched in Canada at the end of 2005, have already started to make inroads in Canada. Posit recently recorded daily volumes equal to about 4% of the TSX.