Michael Thom, Equities Trader, Genus Capital Management offers a look into the Canadian equities world, including perspectives on dark pools as well as algo implementation and usage.
Inverted pricing modelsWe have just seen the introduction of more innovative pricing models in Canada, essentially since the launch of TMX Select. For most buy-side participants like me, we do not see our tick fees as rebates because they are bundled into the commissions we pay to our brokers. This is an exciting development for participants that thrive on different market structures, but I would not say that we particularly benefit from this market model. From an intellectual perspective, it is interesting to wonder what will happen as a result of these developments, but I would not say it has any immediate net benefit to us or our clients.
Trends for Dark Pools in Canada
Canadian regulators have taken the right approach. There are lessons to be learned from other jurisdictions where dark liquidity was left to develop and regulators then had to play catch up. I applaud the Canadian regulators for giving their approach to dark liquidity critical thought before it gets to the point of significantly damaging market quality. Regulators in Canada are at a point now where if they change the regulations significantly, venues and firms would be able to adjust. The debate over the trade-at rule in the US shows that whole business models are built around sub-penny pricing and trading not at the touch. I do not think that is where we want to go in Canada.
I am a little cautious around some of the regulators’ specific proposals on minimum size. I am more in favor of the minimum increment being set at a half penny. The minimum size is the more difficult concept because anything that functions around a single pivot size, either in value or number of shares, can disseminate information through trading around that pivot point.
Although to my knowledge very few participants choose to structure their orders in such a way, it should be up to market participants to build into their orders the minimum execution quantities for dark pools as they see fit. I do not think a lot of buy-side participants are currently building their orders or customizing their third party algorithms to that level of detail. From where I sit, it is not a perfect solution, but this compromise might be the best of the difficult alternatives.
It is important to point out that they are not putting in a minimum size right away. The architecture is built to allow the regulator to, on very short notice or if they start to see some compelling data points, put limits in place without going through the full comment and review process, which is all very prudent. They are giving themselves the tools to deal with all possible market outcomes. Flexibility does not come easily to regulators. Typically, they adopt very specific proposals and if those proposals fail, it is back to square one, whereas here they have given themselves a degree of latitude which is commendable.
Simplifying Algo Implementation The algo and DMA providers who are winning our business are those who can give us transparency right down to how they are interacting with each individual venue, what order types they are using and how they are implementing venue specific idiosyncrasies. If a venue has very unique order types, our providers should say how they are using those and why they made the decision to use the order types they did. Providing a transparent, empirical basis for decisions regarding algo structure, architecture, order types and routing is really important. Many decisions go into building quality algorithms and routing, and those who will share the data behind it are my providers of choice. Algo providers seem to now be more willing to tailor and be empirical about constantly improving the product to fit a firm’s or a trader’s trading styles. That is where algorithmic trading is headed, as it relates to buy-side, and we are just starting to see the leading edge of that in Canada.
