A bank-owned trading system challenges TSX

OTTAWA — An alternative trading system owned by Canadian banks — the announcement of which this month immediately knocked 12% off the share price of the Toronto Stock Exchange’s parent, TSX Group Inc. — threatens to upset Canada’s capital markets. “Global capital markets are changing,” said Jos Schmitt, chief executive of the new initiative, named Alpha, and formerly a partner at The Capital Markets Company Limited (Canada), a Toronto-based international financial-consulting firm. “The future strength of Canadian capital markets depends on our ability to achieve the same kind of efficiencies already being realized around the world by leveraging today’s technology. This new Canadian-driven trading platform is being designed to find those efficiencies, increasing both competitiveness and liquidity,” Mr. Schmitt said. Alpha is expected to be launched in 2008, subject to receiving the required regulatory approvals. On May 5, another ATS, Pure Trading of Toronto, successfully completed its fourth industry test, involving its highest number of participants and vendors. Alpha’s backers primarily are the brokerage arms of banks — including BMO Capital Markets Corp., CIBC World Markets, RBC Capital Markets, Scotia Capital Inc., TD Securities Inc. and National Bank Financial. One securities dealer, Canaccord Capital Inc. of Vancouver, British Columbia, also is involved. Together, they control about 65% of share trading in Canada. The new system will come under National Instrument 21-101, which comprises rules set in place in 2001 by the Montreal-based Canadian Securities Administrators to ensure fair and transparent trading. The CSA, which comprises provincial and territorial regulators, issued a notice April 20 seeking comments on proposed amendments to the trading rules. The notice was made jointly with Toronto-based Market Regulation Services Inc., known as RS, which provides regulation services to Canadian equity markets. “In response to market structure developments and the need to update certain requirements, the CSA [is] proposing amendments to the ATS rules and … publishing a proposal relating to trade-through protection,” said CSA Chairman Jean St-Gelais. “To ensure consistency between provincial securities legislation and [self-regulatory organization] requirements, specifically the universal-market-integrity rules, we have been working closely with RS to develop the joint notice and, in particular, the trade-through proposal and the concepts underlying the ATS rule amendments,” he said. At the moment, Canada’s regulatory system is in a state of flux. Market Regulation Services and the Toronto-based Investment Industry Association of Canada — the broker watchdog arm of the Investment Dealers Association of Canada — were poised to merge (InvestmentNews, May 8, 2006). The IIAC hailed the Alpha announcement. “The timing is appropriate,” Ian Russell, president of the IIAC, told Canadian Press early this month. “It has been important to ensure we get proper regulations and proper technology to deal in a multiple-market environment.” RS is half-owned by TSX, which promised to cede control as part of the merger. So the exchange can scuttle the already long-delayed deal. The Ontario Securities Commission also regulates the Toronto Stock Exchange. Because of Alpha, there’s also a potential conflict over the issue of clearing, which is currently done by the bank-controlled Canadian Depository for Securities Ltd. “We do not discuss applications that are pending,” said Carolyn Shaw-Rimmington, communications project manager for the Toronto-based regulator. Meanwhile, the Toronto Stock Exchange is transforming itself into what it calls a “multi-asset-class operator of electronic marketplaces,” and spent $5.9 million (U.S.) on information and trading systems during the first quarter, up 29% from the amount during the first quarter of 2006.