Despite the fears of some skeptics, the introduction of a speed bump at TSX Alpha Exchange has not adversely affected Canadian market quality, according to a report published Tuesday by the Investment Industry Regulatory Organization of Canada (IIROC) and the Bank of Canada.
The report details the results of research to examine the impact of the TSX Alpha’s adoption of a speed bump and an inverted fee structure, as part of a broader overhaul of the trading venue’s model.
“We find no evidence that this redesign impacted market-wide measures of trading costs or contributed appreciably to segmenting retail order flow away from other Canadian venues with a maker-taker fee structure,” the report says.
Some market watchers expected the use of speed bumps to increase segmentation by discouraging speed-sensitive traders, such as high frequency traders (HFTs) from using certain trading venues, the report notes.
“Prior to Alpha’s launch in 2015, some Canadian market participants expressed concerns that Alpha would increase segmentation in Canada, favouring smaller retail orders at the expense of large institutional orders,” the report adds.
However, it found that the new model attracts order flow that is already segmented by the existence of different trading fee structures. “Our findings show that Alpha is competing for order flow that is, in a sense, already segmented, and outcomes associated with increased segmentation are likely not applicable,” the report concludes.
Some heavy users of Alpha “trade off improvements in fill rates and execution size against mildly larger effective spreads and price impacts,” the report says.
“From a policy perspective, our work demonstrates that certain concerns about speed bumps may not materialize,” the says concludes.