Regulators should force the big brokerage owners of Alpha Trading Systems to reduce their holdings to a minority stake in order to keep stock exchanges fair and competitive, the head of the TMX Group (TSX:X) says.

\u201cThe question is, should parties who potentially have a conflict control a marketplace? My view is they shouldn\u2019t,\u201d said chief executive Tom Kloet in an interview on Monday.

\u201cI\u2019m not suggesting anybody\u2019s manipulating anything, but that is the danger I think is out there.\u201d

Alpha Group, which includes Alpha Trading Systems, was established in 2007 by the brokerage arms of Canada\u2019s six big banks as well as Canaccord Capital Inc., the Canada Pension Plan Investment Board and Desjardins Securities Inc.

While Kloet didn\u2019t directly name Alpha, the trading system is considered the TSX\u2019s main competitor.

Kloet made the comments following a speech at the Canadian Club of Toronto where he discussed the competitiveness of the country\u2019s securities exchanges and their presence on the international market.

He said that his concern is not over ownership of the trading systems, but rather the controlling stake held in them. In the case of Alpha, it\u2019s owned by Canada\u2019s biggest brokerages, which are almost all owned by the country\u2019s largest banks.

\u201cFor the capital markets to continue to evolve in the best way, absolutely parties with conflicted interests shouldn\u2019t control exchanges,\u201d he said.

Kloet stepped back when asked how exactly the regulators should make changes.

\u201cI believe that the neutral position of a marketplace is valuable,\u201d he said. \u201cI\u2019m not going to tell them (the regulators) how they should get there.\u201d

Bay Street veteran Tom Caldwell said the growth of alternative trading platforms in Canada has developed into a \u201cbasic conflict of interest\u201d between the brokerages that run it, and the stocks trading on the market.

\u201cIt\u2019s an arcane topic but it\u2019s an area of massive abuse in the capital markets, and it is the next area for scandal,\u201d he said.

Caldwell explained the big trading firms, namely the banks, are controlling the trading environment and also keeping a lot of their orders off the trading exchange which thins out the \u201cprice discovery,\u201d or the method used to determine the asking price for a stock, that is supposed to be based on supply and demand.

\u201cWhat these companies do is they take away trading volumes from the exchange,\u201d said Caldwell.

\u201cOnce you thin it out, it\u2019s easy to manipulate. So you\u2019re seeing in many exchanges the \u201cbid\u201d and \u201cask\u201d (price) being moved around on very small amounts of stock to predicate a bigger trade taking place\u201d behind-the scenes.

Both Alpha Trading Systems and the Canadian National Stock Exchange have launched systems in recent years, and while neither system has had a major impact on the TMX, Alpha is considered a growing competitor.

Meanwhile, international stock markets have ramped up consolidation, with the TSX taking a 19.9 per cent stake in the EDX London, the equity derivatives business of the London Stock Exchange Group, for $7.7 million in May.

Kloet also encouraged regulators to lift transborder stock trading limits with other countries. He said it doesn\u2019t make sense that Americans can\u2019t directly buy shares on Canadian stock exchanges, arguing it\u2019s only fragmenting the market.

Most U.S. brokers don\u2019t have access to the detailed TSX quotes, partly because of SEC regulations, which makes it difficult to encourage trading of Canadian companies, Caldwell explained.

\u201cIt means we have less buying of Canadian companies in the Untied States, unless they\u2019re listed on the New York Stock Exchange, or an American exchange as well,\u201d he said.

\u201cIt\u2019s a clear example of American protectionism.\u201d

Kloet suggested it could hurt the future development of the Canadian markets.

\u201cThe critical requirement for success is having a truly global perspective,\u201d he said in the speech.

\u201cPart of that means removing impediments to transborder trading. First, between Canada and the United States — ultimately, across other jurisdictions. We stand prepared to offer our assistance to government and other bodies in this effort.\u201d

He also told the audience that businesses need to do a better job to be ambassadors, and promote the country, and that the G8, G20 and Olympics are all events that will put Canadian businesses in front of a receptive audience.

\u201cIf we learned nothing else from the recent financial crisis, it is that public exchanges, with transparent rules, an investor protection role and absolute neutrality, provide a superior model,\u201d he said.

@page_break@TMX Group employs 845 people across its organization, and operates the Toronto Stock Exchange as well as several other markets including the TSX Venture Exchange, Montreal Exchange, Natural Gas Exchange and Boston Options Exchange.

Shares in TMX Group closed 47 cents higher to $29.98 on the Toronto Stock Exchange.

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