TMX wants changes

TMX says the proposed moves are designed to address three major issues: concerns about the impact of high-frequency trading (HFT); complaints about the complexity of market structure in Canada; and fears that Canadian trading volume will migrate to U.S. markets.

The proposals also clearly target the forthcoming trading models being developed by Toronto-based Aequitas Innovations Inc. in its bid to combat predatory HFT. As with Aequitas’ proposed model, the TMX proposes introducing a “speed bump” – between five milliseconds and 25 milliseconds – to Alpha’s trading model.

Passive liquidity orders won’t be subjected to the speed bump.

Nor will the speed bump be used in the TMX’s main markets. For those markets, TMX is introducing new, long-life order types (which will receive priority over other order types) in a bid to encourage liquidity from so-called “natural investors” rather than HFTs.

But reducing the perception that the markets are primarily serving HFTs at the expense of ordinary retail investors isn’t the only goal of these proposed changes. TMX also aims to combat the threat of U.S. markets draining away Canadian liquidity, particularly retail liquidity.

A white paper accompanying TMX’s proposals indicates that U.S. market structure, which allows payment for order flow, enables U.S. wholesalers to attract retail volume from Canadian securities dealers. The proposed changes to Alpha (which include a new fee model that rewards active liquidity) also are designed to make Alpha a more attractive venue for retail order flow and to keep that volume in Canada.

A report on the proposed changes from TD Securities Inc. (TDSI) of Toronto favours both the introduction of new, long-life order types and the closing of two of TMX’s markets. However, the report adds, closing Alpha entirely is preferable to closing TMX Select in order to eliminate a major source of market data fees and avoid the expense of migrating Alpha to the TMX’s new trading engine.

As for creating a more retail-friendly Alpha, the TDSI report says time will tell whether the economics of this approach outweigh the appeal of sending that volume south of the border, but applauds the effort: “We prefer a world where Canadian retail activity stays in Canada, even if it is harder to interact with than today, to one where Canadian retail activity is sold and becomes inaccessible.”

TMX’s proposals require regulatory approval, and those involving Alpha are likely to go out for comment this month.

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