Managing developments in Canadian market structure

Key Takeaways

• Canadian trading venues are driving innovation across the market
• Changes can deliver benefits to brokers but also costs
• Trusted partners can support with technical and market expertise

Canada is a major global capital market, making up 2.7% of the global equities markets by capitalization in 2022. This market plays a vital role in supporting the wider Canadian economy, with a range of different exchanges and trading books having evolved to fulfill the diverse requirements of listing firms and investors.

Exchange providers continue to innovate and brokers and other participants need to be aware of several imminent developments in the Canadian market structure. Such innovation provides a range of potential benefits and opportunities but also has associated costs. Successfully managing these changes is a major challenge for the sell-side.

The Toronto Stock Exchange (TSX) is historically the dominant player in the Canadian equities markets, and remains the largest market by number of listings and market capitalization. Beyond this, there is a varied exchange landscape, serving the needs of a diverse economy, including new and high-growth sectors. For brokers and investors, there is a wide variety of trading venues and books, each serving different strategic goals, and aiming to deliver more efficient execution outcomes.

Fostering innovation

This competitive environment also fosters innovation throughout the capital markets. Exchanges need to constantly consider how they can enhance their offering to attract liquidity and listings. Recent trends and initiatives from Canadian exchanges help to illustrate this process.

The Canadian Stock Exchange (CSE) recently announced plans to introduce a new Market on Close (MOC) facility. This will allow participants to enter both market- and limit-on-close orders throughout the trading day, and introduces a new closing auction period to handle these orders. This focus on closing auctions is partially due to the growing importance of this period across the market. The market share of the closing auction across the Canadian markets grew continuously between 2020 and 2023. In offering this expanded functionality, the venue aims to provide a richer service to investors, and brokers need to support this.

However, such innovation also comes with costs – brokers need to devote time, expertise, and resources to upgrading their systems and processes to support this new facility. It’s not merely the straightforward expense of these upgrades either, since these changes also incur opportunity costs. Resources spent on supporting exchange upgrades need to be diverted from the firm’s own strategic goals, or from supporting clients.

CSE is not the only venue focusing on the market close. Cboe Canada has also announced plans to upgrade its closing call facilities, bringing its offering more in line with both the CSE and TSX. These changes are being deployed alongside a wider technology migration, following on from Cboe’s acquisition of the NEO exchange in 2022. For Cboe, this upgrade is an important step in creating unified cross-border systems and infrastructure.

Fostering global partnerships

Brokers also hope to benefit from the associated market structure enhancements. But this kind of major migration also poses challenges, and working closely with other stakeholders is crucial. When dealing with global trading venues, it can be a benefit to work with global vendors, who can apply their knowledge of systems and processes in other regions.

Other trading venues are also looking to develop their order facilities. TradeLogiq, a leading Alternative Trading System (ATS), has recently announced plans to introduce a new periodic matching order type. By delivering native support for this kind of advanced order functionality, TradeLogiq promises to make it easier for market participants to achieve better execution outcomes. But again, taking advantage of this innovation may impose costs on brokers. For example, these changes may affect routing models, requiring upgrades to be developed and tested ahead of the roll-out of the new functionality.

Market structure changes inevitably come with costs for market participants. Of course, innovation by trading venues can also deliver service improvements and greater opportunities. But managing the impact of these changes is still a burden for brokers. Supporting venue changes can easily end up diverting finite development resources away from other opportunities.

Working with trusted technology partners offers a way forward. This can deliver more than the technical expertise needed to implement system upgrades effectively. Effective collaboration also involves in-depth knowledge of the market itself. A truly effective partner adds value by actively scanning the horizon, building contacts across the industry, and using this expertise to help achieve business goals.