Despite the drama surrounding the ownership of Toronto-based TMX Group Inc., the exchange company has plunged ahead with the rollout of TMX Select, a high-speed alternative trading system with extended hours and no data fees.

TMX executives say the new ATS is the key to recapturing the exchange giant’s foothold in Canada’s trading market; meanwhile, financial services industry players are doubtful about how the new ATS will be received and remain skeptical of its structure.

TMX Select is expected to compete head-to-head with Canada’s leading ATSes, such as Chi-X Canada ATS Ltd. and Alpha Trading Systems LP, both of which are based in Toronto.

TMX’s new system was initially launched in July and, after four weeks of testing a limited number of securities on the Street, it is now fully operational and trading all of the securities listed on the Toronto Stock Exchange and TSX Venture Exchange, says Gary Knight, president and CEO of TMX Select: “It has been a smooth rollout, with no major glitches. But it will take a few more months to get a clearer picture.”

When TMX executives had brainstormed concepts for a new marketplace, they sought the views of domestic and overseas clients. Says Robert Fotheringham, senior vice president, equities trading, TMX: “People said, ‘We want to see you take a shot at the alternative space, but it needs be something different.’ They were demanding an alternative to the traditional broker/price/time model.”

All of the ATSes in Canada, including the classic TSX, operate on a broker/price/time priority model. In this model, trades occur in almost the same way people buy coffee at a coffee shop — orders are served based on who enters the line first — with one exception: brokers are given preference. This means if a preferred broker puts in an order before a non-ranked broker, the preferred broker could have his or her trade pushed to the front of the lineup.

TMX Select eliminates broker preference, says Knight, and executes trades strictly based on the time they arrive and the bid/ask price: “We have basically stripped away any broker preferencing, and given Canada its first true price/time priority marketplace.”

TMX Select also offers expanded trading hours to appeal to more international clients, as well as give traders more time to trade interlisted securities. Rather than the standard 9:30 a.m. to 4 p.m. hours of operation, traders have an extra 2.5 hours to place orders, from 8 a.m. to 5 p.m. Live data feeds from the market also are provided free of charge.

But are these features enough to help TMX recapture its dominant market share of trading? Early indications are that the new system is finding customers. According to statistics from the Toronto-based Investment Industry Regulatory Organization of Canada, TMX Select executed 0.115% of the value of all securities traded in Canada in July. By contrast, it took Chi-X about five and half months from its February 2008 launch to capture the same percentage of trade value.@page_break@However, it’s highly unlikely TMX will ever regain the foothold it had on the market before rival ATSes launched in Canada, says Nick Thadaney, CEO of Toronto-based ITG Canada Corp. , which is the parent company of Toronto-based ATS TriAct Canada Marketplace LP’s MATCH Now system.

“TMX Select is going to help it recapture some trading volume,” says Thadaney, “but [TMX] won’t ever fully restore it. It’s analogous to what if we only had the Bay in Canada and then, within a year, 10 new department stores open — they all offer a different value proposition, and maintaining a 100% market share isn’t realistic.”

Other industry players, such as Jos Schmitt, CEO of Alpha, think that by eliminating broker preference, TMX Select is clearly signalling it is targeting the high-frequency trader community, which uses advanced technology such as computerized algorithms to make trades. Currently, about 30% to 40% of traders are HFTs.

As a result, conventional traders may stay away from TMX Select, says Schmitt, as they don’t want to be trading on a platform on which they may be fully exposed to firms with a potential technological or informational advantage.

“If TMX Select can find a way to level the playing field among participants,” says Schmitt, “the trading volume on the platform should pick up.”

Ownership of TMX has been at issue since a proposed merger between the Toronto-based firm and London Stock Exchange Group PLC was abandoned in June. TMX is now considering a rival bid from Maple Group Acquisition Corp. , which is backed by some of Canada’s big banks and other financial services institutions. Some of Alpha’s owners are part of Maple Group, and one proposed strategy, should the consortium’s bid succeed, is to roll Alpha into TMX Select. The merged company, says Thadaney, would then have about 80% of the trading market.

Since rival ATSes Chi-X and Alpha arrived on the trading scene in 2008, TMX’s share of the value of securities traded in Canada (comprising all trading on the TSX and the TSXV) has dropped by roughly one-third. Looking at IIROC’s figures from June 2009 to June 2011, TMX’s share of the total value traded in Canada fell to 64% from 83%. In that same period, Alpha’s share grew to 16% in June 2011 from 8% in June 2009.

Even if the TMX/Maple Group merger is approved, it’s likely that the trading platforms will continue running separately, adds Thadaney. “While the trading community would like to see marketplaces merge, since one less market is one less set of fees, it’s not in [Maple] Group’s best interests.” IE