Canadian Equity Retail Trading: Smart Order Routing and Regulation

Times seem great for Canadian retail equity investors. They enjoy a wide range of tools from a variety of different platforms that have led to better pricing and services. Canadian retail brokers, on the other hand, have had to deal with an increased cost of trading in a climate of limited liquidity. They have taken on most of the costs for technology advances that have led to easier trading for investors but have seen little increase in revenue as a return on those initiatives. Market data fees, regulatory changes and a fragmented market have also increased broker-dealers’ cost of trading.

Independent firms, which are a large source of financing for the junior stocks in Canada, are under increasing financial pressure and to lose them would have resoundingly negative effects on the small cap market. They do not have the in-house capabilities to create structured products to offer their clients as an alternate source of business and many have disappeared over the last few years due to the high cost of competition.

As trading in Canada becomes more expensive, more and more dealers are looking to the US for execution. US wholesalers already offer greater liquidity and that is stoking fears that as more Canadians move their flow south, liquidity in the Canadian markets will decline even more. Most brokers think the onus is on regulators and the marketplaces to better support the Canadian market and make it more attractive and viable through fee reduction, enhanced order types and greater liquidity (so trading stocks is a better option than buying other products). For Canadians, the stakes are high, as retail flow represents about a quarter of overall volume.