All posts by Richard Carleton

Transformation of CSE’s Trading Services – CSE Response to Dealer Challenges

Richard Carleton, CEO

The Canadian Securities Exchange (“CSE”) is transforming its trading services.  First, with the implementation of a new trading technology platform completed in December last year, the CSE has addressed previously noted latency and performance issues.  The new system has exceeded CSE’s expectations for the project and has been favourably received by clients.  Second, the CSE is introducing new trading features and functionality designed to address issues facing the dealer community in Canada.

Challenges faced by participant dealers

In our view, the biggest challenge facing participant dealers is cost effective execution of agency orders.

The advent of multiple market trading and the rise of the “maker/taker” pricing model have attracted numerous liquidity providers to the Canadian markets.  With liquidity incentives that were several times more generous (on a value traded basis) than US market centres, competing trading firms (often supported with sophisticated computer technology) reduced quoted spreads for actively traded instruments to the minimum increment.

Although the narrower spreads served to benefit clients trading in high turnover stocks, the cost to access the liquidity for their executing firms began to approach prohibitive levels.  These costs include, but are not limited to, exorbitant take fees, multiple ticket charges resulting from smaller average execution size, implementation and maintenance costs for order routers (for compliance and best execution purposes), access fees and market data charges for a burgeoning number of new venues, gaming strategies employed by the liquidity providers, a rising percentage of odd lot orders, and significantly increased compliance risk.  All of these factors have combined to increase dramatically the costs of execution for agency dealers.

CSE addressing the challenges

The CSE has introduced a series of measures designed to address the aforementioned challenges and is adding further functionality and features:

  • a market making programme for all stocks trading on the CSE (CSE, TSX and TSX-V-listed) was introduced in November, 2014. The key feature of the programme is that it provides automated execution for eligible agency orders up to the “guaranteed minimum fill” commitment from the market maker.  We currently have a number of firms providing odd lot and full market making services for both CSE and other market listed stocks.
  • The CSE filed for an enhancement to the GMF programme on February 17, 2017. The proposal, which may be published in the OSC Bulletin for public comment as early as March 2, is intended to increase the opportunity for GMF-eligible orders to be automatically executed at the prevailing national best bid or offer in a single trade ticket.
  • The CSE is also revising its fee schedule. The changes are intended to reduce overall execution costs for agency dealers.
  • The CSE received approval from the Ontario Securities Commission for the introduction of two new features on February 16, 2017. A copy of the OSC notice may be found at:  http://osc.gov.on.ca/en/Marketplaces_cnsx_20170216_market-maker.htm . The first component of the filing, the introduction of standard peg order types, did not attract any comments.  The second component of the filing, the introduction of market maker participation, was somewhat more controversial.  We will spend some time describing how we believe the feature should be eventually implemented, and how it is currently approved.

It is an unfortunate fact of the public comment process in Canada that the conversation with respect to securities regulation, at least from a practitioner viewpoint, is dominated by the institutional trading desks.

In the United States, there are a number of powerful and independent advocates for the interests of retail oriented investors: large mutual fund firms, independent discount brokers and regional brokers servicing a retail investor population.  All intervene on behalf of the interests of their clients.  These entities either do not exist in Canada (the independent discount brokers are all relatively small compared to their bank-owned competitors), or have elected for one reason or another not to take an active role in the policy formation processes.  Consequently, it has been a challenge for the CSE to rally broader public support for enhancements to its offerings for agency clients.

It is also a difficult process to appropriately balance, in a way that satisfies all of the stakeholders in the market, the privileges afforded a market maker with the obligations that they are providing to the marketplace. In our experience, any offering from a marketplace that increases the likelihood of execution of an agency order against the market maker’s book, is more likely than not to be opposed by parties looking to increase their ability to trade against these orders in the open market.

Under the CSE’s original proposal, market makers would have been entitled to participate against up to 40% of the volume of eligible marketable orders.  The current guaranteed fill requirements would remain in effect, such that if the booked volume at the bid or the offer was insufficient to satisfy an in-bound order, there is no elective participation. The market maker is obligated to fill the remaining volume. This restriction to trading with only eligible orders was the most problematic for commenters and the regulators.  Since the market maker was not “obligated” to participate with “all order flow”, the feature was characterized as a “benefit” to the market maker.  The fact that the feature would result in reduced costs and superior execution quality for agency clients and their executing dealer, was not, in our opinion, given sufficient consideration.  As a result, the CSE’s original proposal would not have been approved.

In order to avoid undue delays in delivering the other features that have already been approved, the CSE has determined to deliver a modified version of the participation programme. As set out in the OSC Notice, the CSE participation programme will now allow the market maker to interact with all orders less than the GMF and would limit market maker participation to a maximum of 40% of the GMF commitment.  These features are consistent with market maker participation available on other exchanges in Canada.

Although this is an imperfect result, we will be working to overcome the objections of a subset of the trading community as well as engaging with OSC Staff in the coming weeks.  Our objective is to provide Canadian dealers with a cost effective means of executing large volumes of client orders, while providing appropriate guarantees of both best price and best execution for their clients.  These goals are clearly in the best interest of the public and the market as a whole.

Respectfully,

Richard Carleton

Chief Executive Officer

Welcome to the Canadian Securities Exchange!

Welcome to the new blog  for the Canadian Securities Exchange, The Exchange for Entrepreneurs.

Operated by CNSX Markets Inc., a recognized stock exchange, the Canadian Securities Exchange (or “the CSE” for short) encompasses the activities formerly carried on by the Canadian National Stock Exchange and Pure Trading.

we will continue to focus on lowering the cost of public capital for entrepreneurs in Canada.

As our team travels around North America talking to members of the investment and issuer communities, we hear two consistent areas of concern:  markets have become too fragmented and complex; and the costs of doing business as traders, corporate finance professionals, advisors and issuers in the public markets are becoming prohibitive.  As an exchange operator we are doing our part to address both concerns:

  • In the last few weeks we consolidated the two trading systems (CNSX and Pure Trading) we have operated over the last several years.  Eliminating one of the systems, and related order entry and market data gateways, reduced network and access costs for our dealer and vendor partners.  At the same time we have combined our market data services, meaning that end users receive data for CSE-listed stocks and other Canadian exchange listed stocks on a single service.  Costs for end users who took both of our services previously, have seen their market data costs drop as a result.
  • At the same time, we will continue to focus on lowering the cost of public capital for entrepreneurs in Canada.  Our listing model focuses on enhanced disclosure from the issuers to address regulatory risks and leaves it to the market to analyze and value business risks inherent in a security. The Canadian Securities Exchange is, as a result, able to offer companies a faster and lower cost avenue to public capital than available alternatives.

Already known in the industry for our customer focus and service, we have a number of exciting initiatives scheduled for the coming months designed to address the cost and complexity challenges faced by all of our customers:

  • New trade execution pricing designed to promote liquidity while addressing the cost challenges faced by agency brokers;
  • Creation of a market making programme for CSE-listed stocks to promote tighter spreads and deeper books.  As a component of the programme, a series of tools will be provided for market makers;
  • Delivery of next generation order routing and risk management tools designed to assist dealers in meeting their best ex and best price obligations, while preserving their ability to service direct access customers;
  • Addition of new resources to support our issuers in their efforts to be better heard in the investment community.
CSE CEO Richard Carleton
CSE CEO Richard Carleton

We look forward to meeting with many of you in the coming months as we schedule events across Canada to introduce our new brand and vision to the investment community.

– Richard Carleton, CEO