Pure competition

For the first time in six years, Canada’s main exchange is about to get some competition. On January 19th, Pure Trading, the new exchange operated by CNQ, will launch its continuous auction market.

Pure Trading describes itself as the first alternative visible auction market for securities in Canada. Unlike TriAct Canada Marketplace or Liquidnet, which create a confidential marketplace, sometimes referred to as dark liquidity pools, where large opposing institutional trades are matched and completed without moving the market, Pure Trading plans to compete on the same turf as the TSX.

It’s also different from Nasdaq Canada, which was intended to facilitate order flow from Canada to Nasdaq in New York. Pure Trading, by contrast, will create a new market in Canada.

Pure Trading aims to be better, faster and cheaper than the TSX, says Ian Bandeen, vice-chair and CEO of CNQ and Pure Trading. Pure Trading is currently ironing out bugs in its system by running a cross-printing facility, which allows firms that have both sides of a trade to post the ticket for other investors to see, although the trade never goes into the auction market per se. It’s the primary level of connectivity and seen as a soft way to enter the capital markets.

The exchange’s plan is to take a bite out of the $125 million the TSX collects each year in trade fees. But aside from taking a slice of the TSX’s monopoly, which was Pure Trading’s initial goal, Bandeen now says the addition of his exchange will complement the market.

“If you had asked me a year ago, I would have thought that what we were doing was going to displace a portion of business they were doing,” he says. “I’ve come to change my mind on that.”

Bandeen sees several reasons for this. First, Canada has been without an alternative market for far too long. Foreign investors want to have at least two markets in a jurisdiction so they can show their clients an audit trail that indicates a trade was made where it was most liquid and at the best price, he says.

Another hidden source of interest that Bandeen now identifies but hadn’t initially considered is coming from the larger buy-side accounts in this country. Over the past few years, these firms have been increasingly using algorithms on the market, he explains, but because they were designed to operate most effectively in a multiple market environment, they haven’t been used to their full potential.

“Our arrival will allow the users to max the value and utilize these tools efficiently,” he says. “As a result of those two factors, it’s fair to say that all of the dealers have virtually cottoned on to this, and naturally all of the dealers are motivated to ensure they can achieve the best execution they can for their clients.”

One of those firms is Canaccord Capital. Andrew Jappy, the firm’s chief information officer and executive vice-president, is in charge of getting Canaccord’s systems ready to handle the new exchange. He says it’s a complicated process that impacts not only systems but compliance procedures as well.

For instance, he says, although firms like Canaccord don’t have to be a member of every exchange, regulators have said that firms are required to get the best price for their client, even if that price is available only on another exchange. “That is your ultimate obligation, and you can jitney the transaction through another dealer who does have a connection to that system,” he says.

Steve Kee, director of media and marketing for the TSX, says Canada’s main exchange doesn’t feel threatened by the launch of Pure Trading. “Our primary competition comes from international marketplaces like New York and Nasdaq, where 200 of our largest companies are inter-listed, and we’ve been successful at holding our own and winning back market share over the last five years.”

In recent years the TSX has reduced its fees and offered discounts to its larger customers, but Kee wouldn’t specifically attribute the lowering of fees to the launch of Pure Trading.

Jappy, however, is quite blunt in his assessment. “It’s a straight competitor to the TSX,” he says. “I think Pure Trading has the potential to be successful simply because it is a very straightforward model. The TSX is charging too much and we can do it for less.”

Firms won’t see those savings for some time. In order to accommodate the new exchange, not only do firms have to pay to update their systems but they can expect to have more fees from CDS and from back office vendors.

While firms might notice a savings, the average investor likely will not. “Ultimately, even if we took the $130 million the TSX is making and we said that was going to be zero, and you divided it by the number of trades made in Canada, it would be miniscule,” says Jappy.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(11/14/06)