Canadian Equities Market: 2013 State of the Industry

Regulators worldwide are watching the equity markets in Canada, where changes are being steadily implemented in a bid to find the optimal balance between protecting the market and allowing for sufficient growth. Fragmentation, dark trading, and high frequency trading are all issues on every regulator’s mind, catapulting Canada into the spotlight as participants, academics, vendors and regulators in other markets watch and wait for the data, so they can determine their own course of action.

The Canadian equities market is concentrated. More than 80% of the share volume is traded on a platform owned by the TMX Group; only 3% trades in dark pools, and six Canadian banks command the bulk of the flow, which itself is concentrated in three sectors. Amongst the seven competing trading venues, only one, Chi-X, has made significant inroads with 11% of the total volume, and the economics of broker dark pools are poor.

But concentration, and the consolidation of volume under one roof last year, comes at a price, and the market structure changes implemented to mitigate risk and provide a stable trading environment are in fact nudging the market place towards more competition and further changes. Technology projects consume resources but need to foster growth, else become a burden and undermine innovation. Without a wholesale market, banks’ margins are squeezed and retail participants take liquidity on the expensive side of the open market. In the absence of sufficiently sophisticated dark places to hide, institutions must weigh the cost of the open market versus the price of risk capital.

The size of the Canadian equities market, which ranks eighth in the world in terms of market cap, creates an environment in which the regulators can perhaps be more nimble but there is equally less room to maneuver. If Chi-X continues to gain market share, there will be pressure to innovate in this market place where ongoing investor interest needs to be matched by competitive liquidity. There are opportunities for those that provide liquidity and also target the retail sector, and for vendors and brokers that provide smarter trading tools and cross-border seamless trading.

This is our first bi-annual report of the Canadian equities market and brings together the most important trends in one concise report at a time of market structure change that will be of great interest and benefit to other markets.