The ETF market in Canada is diverse, with trades occurring across multiple venues, including Canada’s two stock exchanges and many alternative trading system (ATS) venues. An ATS venue is a trading venue separate from traditional stock exchanges that matches buyers and sellers (counterparties) for security transactions. This environment may not be familiar to many investors, who are accustomed to hearing about traditional stock exchanges.
Let’s take a look under the hood of ATS venues and demystify these environments for clients. At the end of the day, they bring notable benefits for investors, including healthy competition in securities trading, ultimately leading to better pricing and trading efficiency.
In Canada, the dominant Toronto Stock Exchange (TSX) accounts for less than half of total ETF trading volume, just under 40% in 2016, for example. The remainder is spread out among up to 12 ATS venues and exchanges, such as the Nasdaq CX (15.5%) and Aequitas NEO Exchange (12.3%). It’s important to note ATS trading is largely the domain of institutional investors, while the activity of most retail investors and their advisors is represented on the exchanges.
Some may be concerned that the mix of ATS venues and exchanges creates a more fragmented ecosystem. However, on closer examination, one can see that the presence of more trading venues leads to greater market efficiency. Why? The presence of more ATS venues provides additional competition to the primary exchanges and offer different incentives to attract trades. This in turn promotes greater market efficiency as ETFs would be incented to trade where it is the most inexpensive to do so. As ATS venues make it cheaper to trade away from the main exchanges, they will naturally attract more ETF volume.
Given the significant proportion of trading volume ATS venues account for in Canada, investors may have questions about differences they see in certain ETF trading data (such as last price, bid-ask spreads and volume) quoted from different trading venues. In these instances, they may be relying on information based on one data source, such as the TSX, and may not have the complete picture to make investment decisions compared to an investment professional who may have paid access to several other sources. The important thing to know is that there is no compromise to the underlying data itself. In the instance of bid-ask spreads, for example, the market makers calculate the spreads based on the underlying securities of the ETF as they always do.
Fragmented markets are commonplace around the world, and are not unique to Canada. The ETF markets in the United States and Europe are also fragmented, with heavy use of ATS venues dominated by institutional investors. Advisors and institutional investors have a fiduciary duty to their clients to serve their best interests. As such, traders and financial professionals will innately seek the best price regardless of which ATS venue or exchange gets the trade. Therefore, what may initially seem like a fragmented ETF trading ecosystem at the end of the day benefits investors as this diverse environment represents greater choice.
As the ETF market in Canada continues to grow and develop at an exponential rate, the trading environment for ETFs will continue to evolve, providing a stronger and more efficient system for market participants.
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