Toronto Exchange Cuts Prices as Alpha Platform Starts (Update1)
By Doug Alexander
Nov. 7 (Bloomberg) -- Alpha Trading Systems, the newest platform for trading Canadian equities, is already forcing change at the 147-year-old Toronto Stock Exchange.
Alpha, whose owners include Royal Bank of Canada and Toronto-Dominion Bank, began trading today with 10 stocks. To defend its 98 percent share of the Canadian market, TMX Group Inc., the exchange’s owner, cut prices and revamped its trading engine.
“If Alpha lives up to its expectations, we’ll be welcoming it,” said Sergei Tchetvertnykh, co-chief executive officer of Infinium Group, a brokerage that made the second-most trades on the Toronto bourse this year. “Our strong interest is a great technology, different products and a competitive environment.”
Alpha joins trading platforms in the U.S., Asia and Europe that have taken market share from former monopolies such as the London and New York stock exchanges. Alternative trading systems account for 10 percent to 15 percent of average daily volume in the U.S. and Europe, according to Joe Gawronski, president of Rosenblatt Securities Inc., a New York-based brokerage.
Alpha is Canada’s fourth alternative trading system, or ATS. Canadian Trading & Quotation System Inc. launched Pure Trading in September 2007, followed by Perimeter Financial Corp.’s Omega ATS in December and Chi-X Canada, owned by Nomura Holdings Inc.’s Instinet, in February.
The newest entry is a threat to TMX because its owners account for 54 percent of trading on the Toronto bourse. It’s in their interest to route trades to their system, said Robert Sedran, a Toronto-based analyst at National Bank Financial.
‘More Significant Competitor’
“The fact that the banks own the ATS and the banks are a big part of the trading volume means that you’re going to see Alpha be a more significant competitor,” Sedran said.
Some traders already have plans to try Alpha.
“We will absolutely use it,” said John Reilly, head of Canadian equity trading at Toronto-based RBC Capital Markets, a unit of Canada’s biggest bank. “There needs to be competition.”
Thomas Caldwell, chairman of Toronto-based Caldwell Securities Ltd., said the banks will use Alpha to gain an upper hand over independent security firms seeking to shield their orders.
“They’re our competitors, the enemy,” said Caldwell, 65, who manages more than C$1 billion, including TMX shares. “I don’t think our clients are well-served by channeling our orders into the banking system.”
Biovail Corp., First Quantum Minerals Ltd. and George Weston Ltd. were among the stocks that started trading on Alpha at the 9:30 a.m. market opening. Shares of other companies listed on the Toronto Stock Exchange and TSX Venture Exchange will be added over the next four months.
‘Competitive Landscape’
“It’s key to create a real competitive landscape that has competitors which are credible and meaningful and have an impact on the space,” Alpha CEO Jos Schmitt, 46, said in an interview. “And that’s what’s happening with Alpha.”
Schmitt estimates Alpha will capture 20 percent of the Canadian market in a year. Canada’s alternative exchanges account for 2 percent of the nation’s trading volume, according to TMX.
By comparison, the European trading system Turquoise, set up by nine investment banks, captured 2.5 percent of Europe’s stock trading within five weeks of its Aug. 15 launch, according to CEO Eli Lederman.
In the U.S., Bats Trading Inc. and Direct Edge ECN LLC matched about 19 percent of the shares traded in September, according to Tabb Group LLC., a Westborough, Massachusetts-based research firm.
Incentives, Faster Trading
TMX has fended off competition from upstarts such as Pure and Chi-X by building a faster trading system, adding incentives for traders and cutting fees. TMX said Oct. 29 that it will reduce some fees in January, its sixth cut since October 2005.
“We’re already in a very competitive marketplace, and we think our product is pretty good,” TMX CEO Thomas Kloet, 50, said in an interview. “We continue to look at how we can make our products more and more competitive, and we’ll continue to evolve our marketplace as we see opportunities.”
Equity trading accounts for about a quarter of revenue for TMX, which expanded into derivatives trading after its May takeover of Montreal Exchange Inc.
Investors see a threat: TMX shares fell 12 percent, the biggest drop since they began trading in November 2002, the day Alpha was announced in May 2007.
TMX fell C$1.47, or 5 percent, to C$28.16 at 2:58 p.m. in Toronto Stock Exchange trading. The stock has fallen 47 percent this year, compared with a 25 percent decline by financial shares in the Standard & Poor’s/TSX Composite Index. The broader measure has slumped 31 percent in 2008.
Tchetvertnykh said he’ll wait and see how Alpha performs before committing. Alpha may help drive down trading fees further and attract U.S. firms to start trading in Canada, pumping more liquidity into the market, he said.
“Alpha’s presence has already forced TMX to become much more competitive and invest much more money into technology and do some innovative things,” Tchetvertnykh said.
To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net.
Last Updated: November 7, 2008 15:45 EST |
