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DARK POOL TRADING - Investors need to know.

DARK POOL TRADING - Investors need to know.

UNDERSTANDING ALTERNATIVE TRADING SYSTEMS – ATS  / DARK POOL TRADING

ATS or Alternative Trading Systems are market trading platforms within the Canadian equity marketplace that allow all participants in the Canadian Securities Industry to trade equities, and other financial instruments on ATS regulated trading platforms. These multiple trading platforms were designed, established and instituted to give more Liquidity and Best Fill / Price Discovery to the market. 

This is great in theory, and we believe the regulators had the best intentions in mind for the market. However, the downside to the ATS system is there are no consolidated volume or consolidated market books readily available, at least at no cost, to regular market participants. You can get volume and market book trading data at no cost, from Issuer listed Exchanges like TSX, TSX Venture and CSE, but the Alternative Trading System marketplace doesn’t have the same access to this data. It doesn’t mean it isn’t available, but it is not available to the public via the listed Exchanges which the public has easy access to their own trading data. 

This lack of accessibility leaves investors, not familiar with the ATS, at a potential disadvantage to those who do and use these ATS's to trade equities. In many cases, investors are not seeing all the trades that are happening daily. A free site for viewing delayed ATS trades is Stockwatch. This will give investors a better idea of actual trading volumes.

The Good News:

IIROC regulates securities trading and market-related activities of participants on all Canadian equity marketplaces (i.e. exchanges and alternative trading systems). Each Canadian equity marketplace has retained IIROC to:

  • Administer and enforce the Universal Market Integrity Rules (UMIR), and provide guidance regarding the application of UMIR
  • Monitor and review trade desk procedures of persons accessing the Canadian equity marketplaces
  • Impose trading halts or delays relating to market integrity matters and coordinate halts or delays with other marketplaces

Each Canadian equity marketplace administers, monitors compliance with, and enforces all other marketplace requirements unless IIROC has been retained to administer specific marketplace requirements.

 The ATS Exchanges

Aequitas Innovations:

NEO Exchange

NEO Exchange is an exchange that provides listing services and facilitates trading in securities listed on NEO Exchange, TSX and TSXV. NEO Exchange operates two separate trading books, NEO-N and NEO-L, and a crossing facility which for the purposes of UMIR are considered separate marketplaces. NEO Exchange has retained IIROC to administer its timely disclosure requirements for securities listed on NEO Exchange.

NEO-N

NEO-N provides trading in securities listed on NEO Exchange, TSX and TSXV. NEO-N subjects certain active orders to a delay as determined by NEO Exchange. Order price and volume information (aggregated by price) is available.

NEO-L

NEO-L provides trading in securities listed on NEO Exchange, TSX and TSXV. Order price and volume information is available.

NEO-D

NEO-D (dark) trades at the mid-point with no pre-trade transparency for securities listed on NEO Exchange, TSX and TSXV.

Crossing Facility

The Crossing Facility provides for the crossing of securities listed on NEO Exchange, TSX and TSXV.

 

Canadian Securities Exchange (CSE)

  • CSE is an exchange that provides listing services and facilitates trading on securities listed on CSE, TSX and TSXV. The trading service was previously a distinctly branded facility operated by CNSX Markets Inc. and referred to as Pure Trading. Order price and volume information is available. CSE has retained IIROC to administer its timely disclosure requirements for securities listed on CSE.

 

Instinet Canada Cross Limited (ICX)

  • ICX is an ATS that provides trading in Canadian listed equities. ICX comprises of two order types: VWAP Cross (a point-in-time cross for volume-weighted average price trading) and CBX Canada (continuous matching). No pre-trade information on Participants, order size or pricing is available.

 

Liquidnet Canada Inc. (Liquidnet)

  • Liquidnet is an ATS that provides trading in securities for Participants and Access Persons. Liquidnet enables Access Persons to trade securities directly and anonymously with other Access Persons. The Liquidnet system facilitates negotiation between parties placing compatible orders in securities listed on TSX or TSXV and routes orders for securities traded on various foreign exchanges. No pre-trade information on Participants, Access Persons, order size or pricing is available.

 

Nasdaq CXC Limited (NCXL)

  • Nasdaq Canada is an exchange that provides trading in securities listed on TSX and TSXV. Order price and volume information is available. Nasdaq Canada operates the following three trading books:

CXC

  • CXC offers a continuous auction market matching orders based on price/time priority. All orders entered on CXC are anonymous by default. Members may elect to have post-trade attribution on an order by order basis. Order price and volume information is available.

CX2

  • CX2 offers a continuous auction market matching orders based on price/broker/time priority. Members may elect to have their orders entered without attribution by selecting the anonymous order marker. All attributed orders are eligible for broker preferencing automatically whereas anonymous orders are not. Order price and volume information is available.

CXD

  • CXD is a dark Trading Book (no pre-trade transparency) offering a continuous auction market that matches orders based on price/broker/time priority offering members price improvement and size discovery opportunities. Only trade information is available.

 

Omega ATS (Omega)

  • Omega is an ATS that provides trading in securities listed on TSX, TSXV and CSE. Order price and volume information is available.

 

Lynx ATS (Lynx)

  • Lynx is an ATS that provides trading in securities listed on TSX, TSXV and CSE. Order price and volume information is available.

 

TMX Group

The Toronto Stock Exchange (TSX)

  • TSX is an exchange that provides listing services and facilitates trading in securities listed on TSX. Order price and volume information is available. TSX has also retained IIROC to administer its timely disclosure requirements for securities listed on TSX.

TSX Venture Exchange (TSXV)

  • TSXV is an exchange that provides listing services and facilitates trading in securities listed on TSXV. Order price and volume information is available. TSXV has also retained IIROC to provide the following services:
  • Administer TSXV's timely disclosure requirements
  • Monitor compliance with TSXV policies relating to normal course issuer bids
  • Conduct certain post-trade analysis in respect of the Canadian Unlisted Board

TSX Alpha Exchange

  • TSX Alpha Exchange is an exchange that provides trading in securities listed on TSX and TSXV. Order price and volume information is available.

 

TriAct Canada Marketplace (Match Now)

  • MATCH Now is an ATS that provides trading in securities listed on TSX, TSXV, CSE and NEO Exchange. No pre-trade information on Participants, order size or pricing is available.

 

Market Liquidity

Liquidity can be defined as the market’s capacity to absorb trades from customers’ buy and sell orders at, or near, the last sale price of a particular stock. The greater the number of orders and shares available at a particular price, the more liquid the market will be. Some of the characteristics of liquidity are market depth, market breadth, and resiliency. Market depth refers to the number of orders at different prices that line the book. Market breadth is the number of shares that are wanted at a particular price level and the ability to absorb an incoming large order. Resiliency is the ability for a market to attract offsetting orders relatively quickly when order imbalances occur. An additional aspect that is important to assessing liquidity is the number of transactions executed on a marketplace.

Price Discovery

Price discovery refers to the process through which the execution price for a trade is established. The discovery of a security’s fair market value is derived from two sources: the supply of and demand for the security, which indicate a participant’s willingness to transact at a given price, and information about transactions which have actually occurred. If prices are not transparent to participants, or there is unequal or incomplete information, participants will not be able to make informed decisions. In addition, if participants are not given access to markets where a security trades, they may be discouraged from participating or trading in that security and a less efficient price discovery process may occur.

 

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