ETF Learning Centre - ETFs, alternative trading and market efficiency - RBC Global Asset Management

ETFs, alternative trading and market efficiency

Share            

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.

wooden train tracks


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.

Alternative trading in Canada’s ETF market

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.

More competition = greater efficiency

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.

Importance of getting the full picture

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.

What does this mean when you want to buy or sell an ETF?

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.

For more information about ETF investing, please contact your financial advisor.

WHAT IS THE ROLE OF THE MARKET MAKER
FOR ETFs?

What exactly do they do, and what are they responsible for?

Read More

ETF TERMINOLOGY EXPLAINED

Read More

UNDERSTANDING THE COSTS OF INVESTING IN ETFs

Read More

WHY RBC ETFs?

  • Innovative, high quality and professionally managed
  • Designed to provide attractive risk-adjusted performance
  • Invest with Canada's leading provider of income solutions*
  • Backed by the strength and stability of RBC Global Asset Management
Learn More

RBC Global Asset Management Inc. is Canada's largest fund company by assets under management (IFIC, as of August 31, 2017). Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Please read the prospectus or Fund Facts document before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. RBC ETFs do not seek to return any predetermined amount at maturity. Index returns do not represent RBC ETF returns. RBC ETFs are managed by RBC Global Asset Management Inc., an indirect wholly-owned subsidiary of Royal Bank of Canada. The indicated rates of return are the historical total returns for the periods including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, commission charges or income taxes payable by any unitholder that would have reduced returns.

RBC ETFs are available across Canada. The information contained on this site does not constitute an offer or solicitation to buy or sell any investment fund, security or other product, service or information to any resident of the U.S. or the U.K. or to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot legally be made or to any person to whom it is unlawful to make an offer or solicitation. The information is not intended to provide specific financial, investment, tax, legal or accounting advice for you, and should not be relied upon in that regard. You should not act or rely on the information without seeking the advice of a professional.

This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETF). Please read the prospectus or Fund Facts document before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. RBC ETFs do not seek to return any predetermined amount at maturity. Index returns do not represent RBC ETF returns. RBC ETFs are managed by RBC Global Asset Management Inc., an indirect wholly-owned subsidiary of Royal Bank of Canada.

® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2018