As stock market trading volumes continue to trend at historically high levels, the Toronto Stock Exchange is facing increasing competition from alternative trading systems, according to Kevan Cowan, president of TSX Markets and group head of equities.

In a panel discussion at the FPL Canadian Electronic Trading Conference in Toronto on Monday, Cowan said that the market share held by the Toronto Stock Exchange and the TSX Venture Exchange had fallen to 89% last week, down from 93% at the end of the first quarter of 2009.

“We’re faced with…much more vigorous competition,” he said, noting that such players as Alpha Trading Systems, Chi-X Canada, and Pure Trading have gained market share in recent months.

Alpha Trading Systems has become particularly competitive in recent months, Cowan said. During the month of April, more than 725 million shares were traded over Alpha, and the exchange experienced a staggering 300% increase in daily trades over the course of the month.

The emergence of alternative trading systems is also driving a more competitive pricing environment. At the end of 2008, TMX Group and Alpha both altered their pricing structures to become more competitive, and in the past four months, players such as Pure Trading and Omega ATS have followed suit.

Cowan admitted that the heightened competition could be beneficial for the Canadian marketplace and for the Toronto Stock Exchange.

“Competition makes us a better organization,” he said.

But the multi-marketplace environment also presents new challenges, Cowan warned. Issues such as different order types and fragmentation of the marketplace will need to be addressed, he said.

In addition, he believes the regulatory changes are necessary to avoid giving an unfair advantage to certain market players.

“The reality is I think we do have an unlevel playing field,” he said, explaining that changes such as altering pricing or introducing new order types involves a much longer process for the Toronto Stock Exchange than for its newer competitors. “There were economic incentives put in place to help the newcomers.”

Nicholas Thadaney, CEO of ITG Canada Group, agrees that the environment is unfair. “It’s not fair for you to have to go through a different set of circumstances to make small changes to your business,” he said, responding to Cowan’s remarks in the panel discussion. “There are certain micro structure rules that afford benefits to certain participants at the detriment of others.”

Thadaney expects widespread regulatory changes to result from the financial crisis and the increasing fragmentation of the marketplace.

“There will be an abundance of new rules coming at us,” he said, adding that rules will become more prescriptive rather than principle-based. “With these rules come higher costs and increased burden for all of us. Think Sarbanes-Oxley times 10.”

Meanwhile, trading systems are also seeing volumes remain at historically high levels. While many experts had expected volumes to retreat in 2009 by as much as 20% from their peaks late in 2008, the opposite has been true.

The Toronto Stock Exchange expects volume levels this year to surpass 2008 levels, according to Cowan.

The boost in volume is largely a result of greater participation by international players in Canadian markets, Cowan noted. He expects 50% of the volume growth on the Toronto Stock Exchange this year to be driven by international participants.

“We are seeing increasing global participation in Canadian markets generally.”

He said Canadian markets first attracted substantial international attention during the commodities boom of recent years. But even through the market downturn, this participation has continued to grow as global players recognize the depth and diversity of Canadian markets.

“People realized that Canada was a great place to invest,” he said.

IE