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TSX Select: Is it just another ATS?

I’m pleased to bring you the first of our guest blogs, penned by Renée Colyer, CEO, Forefactor Inc, which provides a useful view on the Canadian market.

The emergence of ATSs in Canada and their relative success has captured the attention of the US, and they are watching the market microstructure unfold. An American colleague said to me recently that the result of ATSs is fragmentation and that it is “a mess that we (Canada) seem bound to create as the Canadian market heads down the same path as its US counterpart.” I am not inclined to agree that fragmentation is a bad thing, as I have no proof either way. I do believe we should learn (the regulators in particular) from any mistakes the US markets have made while attempting to manage the proliferation of over 40 alternative venues to avoid the mess my colleague is referring to.

The TSX was expected to launch a new trading facility (ATS) called TSX Photon in 2009, based on Quantum’s technology, specifically designed to attract high-velocity traders using automated and algorithmic strategies. The recent proliferation of high frequency traders would suggest this idea was ahead of its time. TSX Select, set to launch next February, is much more of the moment. Its technology is again proprietary, based on Quantum. However, network latency monitoring will be undertaken by NetScout (nGenius & Sniffer).

TSX Select has identified its value proposition as twofold. First, it will offer a dark block order type that will fill on lit orders (within the same book – Quantum and Select are not connected on the back-end). That is, if the lit, smaller orders collectively equal the threshold that the client has set (e.g. 10%) on a fully hidden block order, it will execute. It will also source hidden blocks first. They have priority over all other order types. Second, it will offer trade-through protection whereas with some other ATSs a user would have to route away. If you trade on TSX Select, you can trade and book without routing away and be assured that trade-throughs have been prevented with market data.

What does it all mean? Just that, once approved, we can add TSX Select to the list of ATSs competing for volume in Canada. TSX Select will need to leverage TSX Quantum (the main board) as it continues to dominate the market (Fidessa’s data for the week ending 5th November 2010 shows TSX’s share of the market at 72.5%, including TSXV). And it is logical that TMX Group will offer access to that book and perhaps their other markets through TSX Select in future. Alpha has significant order flow in ETFs as well as the not-to-be-dismissed knowledge base and deep pockets of its shareholders. Fidessa shows Alpha’s share of volume was 18.6% for the same period with Chi-X Canada at 4.57%, Pure at 2.79%, MatchNow at 0.87% and Omega at 0.66%.

We will see who comes and who goes and who consolidates. It is an interesting time for Canada as our market is evolving more rapidly than ever before. Much to do with microstructure is afoot.

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