Coming Home – A Detailed Look at Canadian Equity Market Structure

PETER HAYNES: Welcome to TD Cowen's podcast series Bid Out, a market structure perspective from North of 49. My name is Peter Haynes. And today for episode 69, we're coming full circle back to Canada for a discussion on equity market structure on the home turf.
Joining me for today's episode are Doug Clark, the TMX Head of Equity Product Design, been busy lately, and Rob Gouley, Principal, Equity Trading at OMERS, one of Canada's Maple 8 pension funds. Rob and Doug are two of the thought leaders in Canada on market structure topics, and I'm very thankful to be joined by both of them today. Doug, Rob, thanks for coming on the show.
ROB GOULEY: Thanks for having us, Peter.
DOUG CLARK: Cheers. Thank you.
PETER HAYNES: So for regular listeners of this podcast series, you'll know that in 2024, we went around the globe by region to discuss market structure, and never did we come back to Canada in any of these discussions. So I think it's timely that we got together with our attention totally focused on our home and native land.
Before we get into the weeds, I'd like to start with some more general questions on both of your backgrounds and how previous experiences shaped your respective views on market structure. And, Doug, I'm going to start with you.
During your lengthy career, you've had stints at a discount broker, an agency-only broker, a bank-owned dealer, back to the agency-only broker, to a global dealer, and now a Canadian Stock Exchange. How have all of these experiences shaped your view on Canadian market structure?
DOUG CLARK: Yeah. I think, Peter, that I've been kind of lucky that I've gotten to see a little bit of everything. So I started on the retail side at TD, got some exposure not only to retail clients, but also to option trading and understand the value of derivatives, and how they play alongside with the cash equity markets.
Then went over to Canada Trust, got more of the same. Went to ITG, got into program trading and index trading and got to understand market on close and some of the facilities there. Went and worked for BMO, running electronic and program trading and got to see a lot of the issuer-type stuff. So got involved, as you often do, explaining to the issuers what was going on with their stocks, buybacks, index inclusion, and all of that. Got to understand all the dynamics around deals, secondary offerings and the like.
Went back to ITG in a more global role, doing market structure and got to talk to global clients. We had a very large broker-dealer business, so we had a lot of the bulge brackets trading with us. So I had access to their algo creators as well as their market structure folks. Had the brightest of the bright telling me what they were seeing on the rest of the world, which was enlightening.
I had access to some of the biggest buy-side firms in the world. So it's great to get Rob and the Canadian view of what's going on in our market, but it's also great to hear the perception from folks in Boston and San Francisco and London, get to know them.
We also had a dark pool at ITG. And although I wasn't part of that and didn't get involved on the day to day, they would often bring me along to talk to some of their liquidity providers to just give them some insight into what was coming down the tape in terms of regulatory reform and what we were seeing in terms of market structure. So I started building out relationships with the liquidity providers.
Went to Credit Suisse and had a global role in market structure, so similar experiences there. And as a result, I got to know all of the players and see what all of their pain points and their needs and their desires were. And I also got to deal with a lot of the other exchanges and see how they dealt with the broker-dealer community, see what kind of analytics they brought in and see how they went through their order making processes.
So it really gave me exposure to all of that to come away with what I liked, what I didn't like, and what I wanted to replicate and what I wanted to change. So hopefully it's helped put me in a space where I can understand and appreciate the needs and pain points of everybody in the community.
PETER HAYNES: I think the only thing missing from your resume there is working on the buy side in terms of shaping your views, working at the exchange. But I know you've had a lot of exposure to the buy side in your career. I'm sure that helps you in your role you're in right now as you're designing product for the Canadian market.
So Rob, unlike the other guy I just spoke to that doesn't seem to be able to keep a single job, your entire career has been spent at a large Canadian pension fund focused on equity trading. You've become one of Canada's thought leaders on market structure evolution and an expert on global issues, given that your trading pad includes symbols of stocks from all around the world.
How would you compare trading Canadian stocks with trading stocks in other jurisdictions? And is there a particular market that you might consider to be the most similar to Canada?
ROB GOULEY: I would say Canada really stands out. And I'm not sure there is another market that is most comparable to Canada.
If you think through some of the key differences in the Canadian market structure, you have things such as broker preferencing, the application of the dark rules, Canadian approach to PFOF, definition of a marketplace, Canadian interpretation of fair access, order protection rule, and it used to be the closing auction, although the market has since moved to a more globally familiar model.
So there's definitely nuances to trading in Canada. And I think you see that when a lot of the bulge brokers set up their approaches. It's quite common for a global broker to cover the US, along with most of Europe and most of developed Asia, but they might have a separate approach to Canada. And to do Canada well, they might actually have to have folks here on the ground, and that might have to be a separate, self-contained entity.
And so I guess that just demonstrates how Canada is a little different than trading a lot of the other major markets. I think it's important to take those differences into consideration to trade well.
PETER HAYNES: So Doug, Rob just mentioned a whole bunch of the different nuances about the Canadian market, so I want to give you a scenario. You're on the way up the elevator to the 50th floor of First Canadian Place, and you're with a prominent global investor who's brand new to Canada and interested in trading in this market.
So that gives you about two minutes to explain the key differences between trading in Canada compared to, say, the US. Go ahead and give the listeners your elevator pitch and include, how does Canada's market work, and who are the various players as part of that discussion?
DOUG CLARK: Yeah. So first off, if I'm talking to any global investor that's looking at Canada, I'm going to highlight that we are a G7 nation with very differentiated returns than the US. So you get a little bit of diversity in uncorrelated returns.
We have a number of important sectors. I think a lot of folks look at us as just energy and mining commodities. But we've got very strong financials. We've got clean energy. We've got biotech. So there's a fair bit of diversity in what you're investing in.
We also have the envy of the world in terms of venture markets. So we have a lot of the small caps. We've been able to do some interesting things in there thanks to the regulator. A couple of the things that Rob mentioned are really important, and I think the definition of marketplace is probably the most important.
When you think about the US market in particular, a large portion of their more benign, less time-informed flow, the retail flow is already taken out of the market. You see it in the volume, but you really can't interact with it because it's going through single dealer platforms and wholesalers.
Our definition of a market means that you have access to that flow for the most part. There's always going to be a little bit of internalizing within our market, but far less than you see in Western Europe, and certainly far less than you see in the US. And we also have transparency around not just brokers, but around venues. So you can see when a trade has happened, what venue it's happened on.
So you think about in the US, when a trade happens on a dark pool, you see 20,000 shares of a very illiquid name print. You're trying to be a buyer or a seller of that name, you have to go and find, within the 30 dark pools, where did it trade? In Canada, you're going to know, hey, that traded on TSX DRK or traded on MATCHNow, and you can send your liquidity to one venue without sending orders that are going to give up information to the rest of the world.
Now along with that, we do have broker numbers, and they give up the information. They need to be managed and thought of pretty clearly, but they have the ability to give up information if mishandled. They also have the ability to help folks glean information about, where can I find liquidity? So the buy side is pretty used to figuring out what select calls to make. I'm going to call TD because they seem to be active on the other side of the name I'm looking to trade.
Those are the biggest things. We can get into the minutia of how the markets work. But I think that we have a lot of venues. We have a lot of interesting offerings because we've kept retail on market. Our inverted markets are about 25% of the market share in Canada, as opposed to 3% in the US. So there's the ability to capture retail by posting on those venues. If you're willing to put a little research into it, there's a lot more optionality and there's a way to differentiate yourself.
We have a variety of different dark offering types. We have trajectory crosses now. We have block pools. So we have all of the more interesting things that you see in Europe and the US [? X ?] the internalization. And I think that makes for a pretty interesting, pretty robust market with a lot of interesting assets to invest in.
PETER HAYNES: We're definitely going to dig in on whether or not some of those innovations that are coming to Canada from other marketplaces have a chance to be successful here. We'll get to that in a minute.
But you mentioned the venture exchange, which, as you write, the Canada structure, two-tiered regulatory structure on venture and large cap, is the envy of the world. It's actually an impressive number. I can't remember the specific number of stocks that are in the composite today that have graduated from venture.
And I was actually looking at one this morning for, on the index side, a company called G Mining Ventures, GMIN, which is likely to be added to the composite in March, and it was a graduate that came up to the TSX from venture in January of 2024. And if we don't have that feeder ground, our market's going to be in big trouble, especially given that we haven't seen a lot of IPOs lately.
But there is one topic, Doug, that I did want to ask you about, and that is this volume that we see that happens in the US OTC market on stocks that are listed only in Canada. Where is that volume coming from and why doesn't it trade in Canada?
DOUG CLARK: Yeah, that's a great question. And really, we've had these so-called F series names trading on the US OTC market for at least a couple of decades now, but the volumes have rocketed since about 2015. And I know, Peter, you've been writing about this and following this for that time and longer.
It really comes down from changes in the way that FINRA has dealt with the US retail brokers. And they started giving out guidance somewhere around 2015 that they wanted those trades to trade in the US and that they were watching for trade-throughs against the OTC market.
And effectively what the retail firms in the US felt was they could trade through the Canadian market a million times and nobody would care. But if they traded through the US OTC market once, they were going to get that call from FINRA, and the compliance guys then pushed them to do that. At that point, the US wholesalers who were making markets on the NMS stocks started also servicing those OTC stocks.
And so the big US retail firms found it easier from a compliance perspective, but also from certainty of execution, to go to the US wholesalers and get those trades done, despite the fact that the Canadian market has a tighter spread 95%-plus percent of the time. I haven't updated those numbers in a little bit. But we've updated them-- I think you and I have both updated them over the years a fair number of times, and we are almost always the better market. But unfortunately, those trades are happening in the US.
It creates some issues for our issuers, because what happens, particularly on the less liquid names is the market maker will make markets all day long in the US. The last trade in the US may be at 2:30 in the afternoon. The US market maker then comes to offset their position and they do so at 3:59:57 seconds.
And so you see a large number of trades in our market in the last three, four, or five seconds on venture names, half of which are buyers, half of which are sells. And the issuers just feel like every second day, somebody's selling my stock with two seconds left, and it looks to them like it's naked short selling and toxic flow. It's actually just a market maker hedging a position that they may have got long, an hour and a half, two hours earlier, but it creates a perception for issuers.
And I'm constantly talking to them, trying to explain to them why those trades are happening in the last few seconds. And there's no opportunity for somebody to then stabilize that market because it's happened so late in the day.
PETER HAYNES: Doug, I recall when you were chair of the STA that you, I think, approached FINRA on behalf of Canada, or somewhere along the way. What do regulators in the US say when you make that argument, that the market is better in Canada and ultimately the investor in the US is not getting the best outcome possible?
DOUG CLARK: Yeah. We've had a few folks at FINRA and the SEC who have been sympathetic to that argument. Most notably the late Tom Guerra, who was head of markets, unfortunately passed away in, I think, 2020 or 2021. He had some exposure to Canada. I think his son went to U of T, and he had family here, so he was maybe a little more sympathetic than others.
We have had other folks at FINRA who, quite frankly, gave us a brush off. We've worked with Jim Toes in the STA. We've worked with SIFMA. The TMX, before I got here, was a part of that process. The Canadian STA was a part of that process. We continue to try and have those discussions. We are not having the success we would like to.
It's frustrating because we are the tighter market. The folks that are making markets in the US are coming to our market to hedge because this is where the natural, real liquidity resides. We will continue to have those discussions. Hopefully at some point they'll bear some fruit, but it has been frustrating for a number of years for many Canadians.
PETER HAYNES: This is probably where I'm supposed to insert a joke about the 51st state, but as a Canadian, I'm not finding that joke right now. But speaking of 51%, Rob, there was a story on Bloomberg today, which you probably saw, that talks about the fact that there's now more dark activity in the US than there is lit activity at 51%.
Interestingly enough, when you compare that to Canada, most of the volume that takes place in Canada actually happens on transparent venues, and as Doug mentioned earlier, with the broker IDs, so that the market knows which firm executed which trade.
Although interestingly enough, Canada still somehow gets criticized as an opaque place to trade. Is there anything that you would want to add to Doug's description of Canada that he mentioned earlier? And what do you think of the idea that broker IDs exist on every trade?
ROB GOULEY: The broker IDs on every trade, I think, it's not really that meaningful of an issue to me. I mean, I think a lot of folks that use broker IDs still, they want to do so because they want to advertise. And that's typically a high-touch trade. Oftentimes it's someone maybe committing capital, or crossing two clients on a block. And they're intentionally advertising that trade because they want to try to generate some follow-on business.
I think most of the trading that would be harmed by some of the information leakage that might be let out from broker IDs tends to trade under anonymous anyway. And so to me, displayed broker IDs aren't that much of an issue.
I do think it's interesting to think about that statement that Canada is an opaque place to trade. And I think I understand what those traders might be getting at, although I think it's important to clarify exactly what they mean by opaque.
To your point, the dark volume in the US is much, much larger than in Canada, right? You said just over 50% dark in the US versus 10% here in Canada, or a little over 10% here in Canada. And to me, that's really a symptom of a concentration issue, right? Like, most of the dark volume that's trading is all reference priced trades, right?
So the price discovery is happening in the lit market, often on the primary exchange, and then those nondisplayed markets are simply referencing those bid-ask spreads and the best price to cross volume that is wants to trade at the best price but maybe not looking to discover the best price.
And so it's not really technically correct to say Canada is more opaque, although perhaps it's more challenging to trade, because some of the nuances that I mentioned earlier. And so that gives traders the impression that they can't find the liquidity that they're looking for as easily, and they need to work with a good broker-dealer and ask the right questions to really understand, why are they getting filled here and not there, and what could they do to trade Canada more successfully?
PETER HAYNES: Yeah. I know it's-- I think sometimes Canada gets a bad rap because of how closely aligned we are with the US market. And you used the term reference, using reference prices for trades in the dark. Others might use the term free riding. I wouldn't be surprised to see that debate get a little louder in the US from the exchanges.
And just one other clarification that Rob mentioned about the anonymous broker. As we have broker numbers in Canada, when you see a trade that takes place with the broker number 01, that's the anonymous, that's when someone wants to hide their intentions. And we see the global brokers often will use 01 on their schedule-based trades to avoid any footprint leakage. That it's coming in from Morgan Stanley, who's not going to buy 200 shares of X. They're going to want to buy XYZ. There are going to probably be 200 shares of XYZ for every 10-minute window throughout the day so they'll use 01 to hide on those types of trades.
And so Doug, 2025 appears as though it'll be a big year for innovation in Canada. There's been one new marketplace already announced, that CIX, C-I-X, which is scheduled to launch in the middle of the year and will utilize IntelligentCross's periodic matching logic. And there's another existing Canadian venue, Tradelogiq's Lynx ATS, that plans to convert its matching engine to a periodic model.
In addition, as you mentioned earlier, we already have trajectory crossing here through PureStream, which is actually incorporated as an order type on NASDAQ's dark market in Canada, trading, I don't know, about 400,000 shares per day. And meanwhile, the TSX is about one year into its launch of AlphaX, which was modeled after IEX in the US.
I think you're trading approximately a million shares per day, and I think that's considered to be a fairly low number. Can you tell our listeners about AlphaX, and why so far in its first year, the new venue has struggled to gain traction?
DOUG CLARK: I would say watch that number, because we're finally starting to get a little traction. And I think the last couple of days you've seen an uptick. So it takes a while. And partly, if you're going to come in to a market like Canada that is a smaller market and do something innovative, you better do it really well.
And we did some things well, but we also, I think, had some learnings. We made some mistakes. I think our pricing was overly ambitious. So we're changing some of our premium pricing as of next week to get it more in line with other markets. I think that some of our features were done well, some of our features we could have been a little tighter on how we did them.
But the other thing is, when you look at when IEX went live, they had a couple of things go for them. One, they had the buy side rally around them. And we made a very conscious choice not to do that because we know what the feedback was from some of the sell side. It's a great way to start. But you also, when you have buy side telling sell side, you must use this venue, you don't make long-term friends and you cap your upside.
And the other thing is, IEX did a very good job of getting one dealer to come out and build algos that actually emphasized their order types. And they went out, they had very good success. The order type was working. The markets were great. That dealer went out and said, hey, we use IEX within our VWAP. We have better success than our traditional VWAP. And that led other dealers to have to try and duplicate it.
And so now when you see new venues that are interesting in the US go live, dealers are always interested in the story and trying to understand, how can we turn this into a feature within our algos to do something similar? We haven't quite seen that appetite in Canada. We're working hard on it. We're starting to see a couple of dealers that are looking at AlphaX the way they look at IEX, or similar to the way they look at IEX in the US, and we do think we're going to have a much better 2025. But it takes time.
In the US, when you open up, there are a number of dealers who are interested right away. Not to say you can get them there right away. You better have the right story. You better have the right technology. You better make it easy on them. Having just gone through this in the US, I can tell you that.
But in Canada, it's a little bit more of a sales pitch. It's a little slower. We didn't necessarily do everything we should have done correctly. We're trying to fix track on that. I think we will do well, but I would say everybody else is the same. When you come live with this, it's not something that's going to be picked up instantly. You better be able to demonstrate the value to the dealers.
The dealers have a lot of other stuff they're trying to do. They're trying to build their own algos, they're trying to do their own analytics, whatever it is, and you're crashing their tech queue, you better add value. And if you don't, they're not going to adopt you.
PETER HAYNES: Yeah. Doug, at the end of the day, I think it's going to be about performance. If these venues give good performance and good markets, then you're going to see people want to use them. And I know one of the things that we've talked about in our research is the efficacy of your signal, which I'm sure is something you're going to fine tune. And as that gets better, maybe the performance gets better and it becomes a bit of a virtuous circle there for you.
And on that same vein, Rob, one of the things I've really liked about your trading style is your willingness to experiment with new trading strategies, often in partnership with the sell side. In one case, I know you worked with Eric Stockland from BMO on a strategy involving order placement with IEX, and I know there was a research piece that was published that the street saw on that.
Can you tell our listeners about this experiment with IEX? And I'm curious if you share my thesis that smart markets like IEX, PureStream, IntelligentCross might struggle to succeed in a market like Canada where the size of the market just may not be big enough to allow all of these venues to reach critical mass.
ROB GOULEY: Sure. So the nature of the experiment with Stockland and BMO was basically trying to position BMO to be able to differentiate themselves. OMERS and BMO had a good relationship for a long time. They were looking for a way to try to capture more market share of our trading business, and so Eric and I and a few others got to talking.
And one of the things that came up was we could take advantage of these new order types on IEX. And at first, this was a little alarmist, because it's a change of mindset for a broker-dealer. The nature of the D-Limit order type, the idea that you might be able to get a trade, but not all trades are trades you want to do. That sometimes adverse selection is a problem to child order performance, in that you might be better off to cancel your order and repost your order at a better price than take a fill. That was a bit of a radical idea at the time.
But to their credit, BMO and Stockland and the team there, they were willing to start experimenting with it. And we worked with them, and we thought there was an opportunity to improve performance, and we saw it. We monitored it, we measured it, we talked about it frequently, and it worked.
I think that was a great example that we wanted to put out to the street just to show that just because you can get filled doesn't mean you always want to. And that's a bit of a change in mindset for the buy side trader, right? Sometimes you want to not trade and wait for a better price to trade. And if you can do that in a systematic fashion on a VWAP, you can potentially add a little bit of value there. And so that's what we did working with BMO.
In terms of the other venues coming to Canada and trying to capture market share, I think it's great that we're seeing more innovative models and more marketplaces coming into Canada. It is challenging for those offerings to gain market share, to Doug's point. If you're going to come in with a new model to a small market like Canada, you'd better market yourself well.
But I think it's also important to understand some of the, I guess, nuances to Canada that make it more difficult to launch a new marketplace here. The dark rules make it more difficult to launch a new marketplace, especially if it's going to be a nondisplayed model.
PETER HAYNES: Can you just explain the dark rules? Just I think we need to make sure everybody understands what differentiates Canada's dark rules from, say, the US.
ROB GOULEY: Sure, sure. So the big difference in the Canadian dark rules is that at-the-touch trading is limited. So in the US, you can trade on a nondisplayed venue at the bid or at the ask. Whereas in Canada, in order to do that, you need to provide price improvement unless the trade is above a minimum size, which gets to $100,000 or 5,000 shares, if I recall correctly.
And so that rule alone really disincentivizes dark trading. And I would suggest that's probably one of the reasons why you see only 10% or so of Canadian wide volume trading in the dark, whereas in the US, you see 50% of the volume trading in the dark.
The other big factor that makes it challenging to launch a new marketplace in Canada would be the fair access rules, right? And so there, it's the interpretation of fair access. In the US, fair access is interpreted much more liberally as it applies to Reg ATS and nonexchange marketplaces.
You're allowed to essentially select your counterparty in the US. You can choose the types of participants you want to interact with on an ATS venue in the US, and that's a trend that is growing in demand from a lot of clients. A lot of clients and a lot of brokers are looking to limit who they interact with in the US market.
In Canada, it's a little more challenging to do that. The fair access rules in Canada are a little bit more strict. We consider an ATS venue in Canada to be quite similar to an exchange, at least, as it applies to fair access. And so it's much more difficult to select your counterparty on an ATS in Canada. That's generally something that hasn't been allowed.
And so that limits the potential for innovation for some of these new venues. And I think that explains why there are so many venues in the US and so many different models, and why maybe there's not quite as many here in Canada.
I think the last thing you wanted me to touch on was what we're looking for in broker-dealers.
PETER HAYNES: Well, you mentioned earlier, Rob, just that sometimes the global dealers to be successful in Canada need to be on the ground in Canada. And we do find that some of those global dealers will just try to copy-paste some of their electronic tools from the US, maybe not successfully, in Canada. So yeah, I wanted to understand the different-- what you're looking for in your electronic trading counterparties for trading in Canada.
ROB GOULEY: A lot of them do try to copy and paste their US approach to Canada, and generally that doesn't work out very well. The other thing that we've seen with a lot of the global dealers is they'll look for a Canadian partner, right? And so they'll effectively outsource the Canada piece of their global offering, too, to a local Canadian partner.
We touched on it a little bit earlier. I think it came up-- the word differentiation came up. And so that's really the big one, right? Does the broker have an offering that is differentiated? The other things we would look at is, how does trading fit into the broker's business? Is trading seen as merely a vehicle to collect payment, or is trading a real standalone business within the broker-dealer?
Does the broker have local experts that understand the market structure and can take advantage of some of the nuances of Canada? What does the broker buy versus what do they build? Can they speak to it? Do they have sales coverage that can articulate their approach in a way that makes it understandable to the buy side client? All of that is important.
And then finally, just good old service, right? If we go to a broker-dealer and we express a problem, like we trade a lot of schedule-based flow with a lot of adverse selection, we want to see if we can squeak out a little bit of marginal performance. Can the broker come back to us with some ideas that we can discuss together to work on an approach to trade better?
PETER HAYNES: Well, you just laid out a roadmap for anyone that's wanting to do business in Canadian markets, so I'm sure there'll be some people who appreciate that.
Just before we tie a bow on Canada and innovation, I think your point about education-- honestly, I had a podcast earlier with Armando Diaz, who runs PureStream, and I just went and looked at PureStream in Canada the other day, bottom line is it is-- these are complicated new innovations. You need to spend time figuring them out, and you need to spend time, as a marketplace, educating the users. I do not think that can be discounted.
So Doug, I'm sure you're appreciating this for the next topic, because we will stray slightly outside of Canada on this question. And it's around the fact that you have launched a new ATS this week in the US, which is the TSX's first venture, or dipping your toe into the US equity ocean.
Can you explain what is unique about this AlphaX US venue ATS that you've just launched? And can you maybe help us understand how you might rebrand the fact that you have now three distinct markets under the TMX umbrella using the name Alpha, and they all have different market models? So can you tell us maybe a little bit about each of those offerings and whether you'll rebrand them?
DOUG CLARK: I can. And the answer on rebranding will be no, but I'll get to that in a second. So what we launched a couple of days ago, as this is being taped, and maybe a few days ago by the time this actually gets out to the street, was a periodic auction market ATS in the US. It is 10 milliseconds between auctions with a 1 millisecond or 10% band to randomize.
What makes it unique from other periodic auctions in the US is that trades can happen within the entire NBBO. They don't just happen at the midpoint, so there's a lot of flow. You think of schedule-based algos, a VWAP, for example, 30% of the time, 35% of the time, you're not willing to go to the mid. If you're a buyer, you're not willing to pay up to the mid or beyond, because you're in the early portion of a passive order type. We now expand that so you can get that right across.
Perhaps more importantly, what you just spoke about is the ease of adoption. And the ease of adoption is, A, a story that people can understand. As you look at some of these US offerings, they are indeed incredibly complicated. What's more challenging is actually implementing them.
So some of these are phenomenal ideas where you have multiple PhDs coming up with concepts on how to implement, but the actual build out for the dealer is months, if not a year, because there's new order types, there's new data feeds, there's a lot new to go into the algo kit. We have tried to keep this as simplistic as possible, using only existing order types.
And then to Rob's talk about segmentation in the US, where you can choose who you trade with, once we have enough data, we will allow segmentation. It's going to be on quantitative markets. Now, before you can do that, you have to have data from all the participants to see what tiers they would go in.
But instead of just saying, hey Rob, you can send me an order where you only want to trade with tier 1 or with tier 2, you can always limit yourself to only trade against people in your tier and above. So if you're a tier 2 player, you can say, I only want to trade with tier 1 and tier 2, we've allowed for trees.
So Rob can send an order that would say, for the first minute, I only want to trade with myself. For the next two minutes, I want to trade with myself and tier 1, because I'm in tier 1. And on that leg, I want to have a minimum size of 100 shares. I don't want any odd lots because I don't want any information leakage for less than a minimum fill. Maybe after that for five minutes I'll trade with tier 1, 2, and 3, but I want a minimum size of, say, 500 shares on that, and at that point, cancel the order back to me.
So instead of sending us an order, canceling it, resending an order and having all the excess message traffic, you do it once and you can have multiple routes within your system, and so your passive VWAP can always go through one of these trees. The real upside for this for the broker-dealer is when you want to make a change, you don't go into your algo kit. You don't have to do any build.
You go into a GUI that we've created, a hub, and you just say, for my passive VWAP, instead of trading with myself for a minute, let's make that two minutes. We do all the work downstream. So for your algo guys, it no longer has to go into your queue. You can do it in a single day and it's live the next day.
And that allows us to come back to Rob with analytics and say, hey Rob, on this one route you have that you've marked-- you've named it passive VWAP, you only trade with yourself for the first minute. Well, your fills are all coming in the first 10 seconds. You're wasting 50 seconds and you're getting only 2% of your fills. Maybe you move on after 10 seconds or 15 seconds
Or hey, you're only trading with tier 1. Just so you know, if you opened that up to tier 2, here's how much more flow you would interact with, and here's some guidance around roughly what we think the markets would be. We can never give you an exact number because you don't know what's going to happen if you get a fill. But we can give you some guidance of what flow are you protecting yourself from? It makes it a lot easier to figure out how to use the facility better.
So we're really trying to differentiate ourselves with the periodic option, trading within the full NBBO, making it really easy for the dealers, and then coming back with analytics that help people build out to it easier. On a small venue, you're not going to do the work to figure out how to use the order types, so we're going to do it for you.
PETER HAYNES: But you're going to keep all three of those venues called Alpha and confuse the heck out of all of us?
DOUG CLARK: OK. Let me ask you, off the top of your head, that's X, that's Y, which one's inverted, which one's make or take?
PETER HAYNES: I don't know.
DOUG CLARK: Exactly. When you talk about markets, markets are incredibly complicated. So we have two brands. We have TSX, which is our legacy exchange, it's our listing market with our auctions, and we have an Alpha sleeve. Alpha sleeves are alternative venues that downplay speed is a factor.
So we have a speed bump up in Canada. We have a D-Limit order type up in Canada. We have a periodic auction. They're all slightly different, but what we've done is we have emphasized execution quality and slightly de-emphasized speed. It is not purely about who's there first. We've put some system into place that has changed that dynamic of fastest wins. And so the Alpha sleeve is always going to be that.
But you really have to dig deep to figure out which one's make-take, which one's take-make, which one has certain order types, as you do with any. When you see NYSE American, it's not actually more American than NYSE Arca. NASDAQ Pacific, their servers aren't any closer to the Pacific Ocean than NASDAQ Classic.
So branding is tough when you have really complicated products. So just think of Alpha as the alternative execution, performance-based markets, and TSX as the legacy, standard, auctions listing market.
PETER HAYNES: All right. Well, I will accept that, but I'll just let you know, it remains confusing. And I think part of the AlphaX US confusion is that I think initially the market thought that that would look like the AlphaX in Canada, and it doesn't. It's a different market model. And so I'm just providing you feedback from the industry. And I'm sure it goes into your algorithm. And I understand what you're saying about the branding, it's complex.
So Rob, you mentioned briefly earlier that MOC has changed in Canada, and I think it's important to dig in a little bit. In October of 2021, the TSX introduced a very significant change to market on close in Canada. I know you were involved in that process, and I would argue that the new MOC on the TSX looks a lot like NASDAQ's MOC in the US. Can you tell the audience about what changed specifically in Canada? And what's your take on these changes two and a half years later?
ROB GOULEY: The biggest change between the old MOC and the new MOC, I would say, is probably the imbalance message, right? And so with the old MOC model, it was seen as a bit of a global outlier. It was a static imbalance message that came out at 3:40. Folks were only allowed to provide liquidity that offset the imbalance, meaning that if the imbalance was published at 3:40 as a big sell, you could only send in buy orders.
And that resulted in some peculiar outcomes. Because over time, the street figured out that you could use the imbalance message to trade around the imbalance, and it resulted in some peculiar outcomes that frustrated traders, and especially the global traders. And here's a good example, right?
Under the old model, big sell imbalance is published at 3:40, but the market is surprised. Everybody thought that there was going to be a big index addition and that there was a lot of demand, and they were actually expecting the imbalance message to come out as a strong buy, and that the price to be bid up a little bit in the last 20 minutes of trading.
Sell imbalance comes out, market starts to drift down, but over the next 20 minutes, that demand does surface and the shares end up being bid up, bid up, bid up, bid up, and the MOC ends up closing up 2%. It's a peculiar outcome, right? Imbalance was published as a sell, market ended up trading higher in the last 20 minutes. A lot of global investors and a lot of Canadian investors ended up scratching their head in that situation.
And folks didn't like that approach. They wanted to do-- they wanted something that was more familiar. They also wanted something that was more reactive. And so to your point, Canada adopted a model that was more similar to the NASDAQ. And so with the new MOC, the imbalance is published at 3:50.
The big difference, though, is that it's not a static one-time imbalance message. It's republished, I think, every 10 seconds. And so as the supply-demand changes, a new imbalance message comes out and the market can react up until 3:57-ish, I think, where there's a freeze. And then at that point now, the market has three minutes to discover the price necessary to clear whatever remaining imbalance is left, and then the auction will trade at 4:00 PM, similar to what it would in the past.
And so I think that model was an overwhelming success. I think everything about it was a grand slam home run. I think the consultation, the industry-wide participation, the debate about the type of auction models was fantastic. If you recall, I think you had all the different participants present the pros and cons of a London-style closing auction, a NYSE-style closing auction, a NASDAQ closing auction.
And we ended up with something that the whole industry, I think, considers to be a success, and I think the volumes show it, right? I think MOC volume's now a little over 10%, Doug, trades in the TSX closing auction?
DOUG CLARK: Yeah. I think it's even getting closer to 15%. I will say there's been a global increase as well. So it's not just Canada-specific, but absolutely agree it's been a success.
PETER HAYNES: Well, with that success, Doug, can you possibly lower fees for users given how much you're generating on the special terms fees we pay for MOC?
DOUG CLARK: Just looking at the questions I got ahead of time, I don't see that one, so we'll come back to that at a later date.
[LAUGHTER]
PETER HAYNES: I had to throw it in there. I will say, Rob, to your point about consultation, Mexico's going through the exact same process right now with a consultation on their market on close or potential market on close mechanism. And certainly I think the feedback that they've heard from the Canadian experience will help shape any decisions that they're making, so that's exciting to watch.
So, Doug, when TSX announced it was launching a US ATS, which you just explained a minute ago, I have to admit, my first reaction was I didn't like the idea, and I was worried it would take management's eye off the ball, and that that might hurt the Canadian market. I will say, two years later, my view has changed completely, as I now believe you need to expand the TSX into the US to diversify your equity offering and to protect against the risk that Canada's equity market continues to atrophy.
After all, like every other developed market not named the US, Canada is suffering from a near death of its IPO market and the continued erosion of market share in our listed names to the US market.
Plus we have, really, all of our large cap companies that keep saying to us they want to be thought of as US because it'll get them a valuation bump. I'm curious whether you think this is a cyclical issue that we're dealing with for Canada and other markets, or a secular trend. And what suggestions might you have for Canada to help defend our turf?
DOUG CLARK: Yeah, that's a biggie. And I'll just say that when the Canadian banks first went into the US, I think there was a lot of the similar thought is, the big fish in the small pond is going to go and get eaten in the ocean. For yourselves, for BMO, for others, it has gone really well. But the key is you've got to get the right folks. So the one thing that we did is we hired a phenomenal CEO, which allowed Canadian management to keep their eye on the ball in Canada.
But more importantly, your question about what's going on in Canada with the financing market, we are certainly concerned. We would be far more concerned if most of the rest of the world weren't going through the same thing.
We've seen what's going on in the UK post-Brexit. They've probably suffered more than anybody. They've had large round tables that have been fun to watch, and I think something that other markets should consider. But we've seen Germany losing issues to the US. We've seen a lot of other markets doing it.
We hope that it's cyclical and it's not something that is more permanent. We think there are some things that we need to do as an industry, and everybody's got to chip in. We've all got to be on our best game. We're now in a global market where everything we do, we're fighting with the best players globally.
So that means markets have to be efficient. They have to be well-priced. They have to be thoughtful in their construction. It means that broker-dealers have got to be servicing. It means the investors have got to be there. But it also means that regulators and government bodies have to have the right systems. And that's tax policy, it's research grants, it's regulatory thoughts around market structure and market dynamics.
We have seen some disappointing announcements of late. I think certainly the capital gains tax announcement we got late last year was disappointing to a lot of folks in that it was not well-structured. It wasn't thoughtful about what it would do for foreign investment. It was kind of random. There wasn't a lot of notice that it was coming. And it certainly didn't help us. Those sorts of things, we as a marketplace have to challenge fairly aggressively.
We've seen some work. We've certainly been at the forefront, along with industry, on trying to harmonize some of the research grants that are allowed in Canada. We have some grants that you have to be a private company to get. You can't get them if you're a public company.
The dynamics of how you're financed shouldn't make a difference when you're doing research into new technologies, into green technologies, on whether you're eligible for grants. And we have to have rule sets that make sense there. So we all have to be on our best game.
But I think Canada still can be very competitive. Certainly the US has sucked all the air out of the room for everybody. We've seen that in the index numbers. We've seen the big seven have soared in such a way that everybody's getting an uptick. But we think that Canada will continue to be competitive. We're not closing shop anytime soon. But we all have to be on our best game.
PETER HAYNES: Yeah. And I think, Doug, we've heard from all of our political leaders, with all of the stuff around the Trump tariffs, that there needs to be a pro-business environment here in the Canadian market. So perhaps that'll be a catalyst as we move forward to a more pro-business environment that helps our IPOs and our growth in the economy overall.
So Rob, let's just talk about some of the current events in market structure right now impacting Canada. In December, CIRO filed for public comment its proposal for tick increments on tick-constrained stocks in response to the SEC's proposal to narrow ticks on the US's most liquid stocks. And that proposal in the US potentially impacts about 80 or so Canadian inter-listed names.
More recently, yesterday, or earlier this week, the CSA proposed to cut access fee caps on inter-listed stocks to 10 mills, and that would be in line with the US, but to leave noninter-listed names capped at 17 mills. What do you make of the Canadian regulatory response to the SEC's market structure changes?
ROB GOULEY: Yeah. The CIRO report that you mentioned, I haven't got a chance to really dig into that one yet. But my initial take on it is they're hedging themselves a little bit. I think it's widely accepted that, given the porous nature of trading in the inter-listeds between Canada and the US, that if the US goes to 10 mill access fee cap, then Canada has to follow. And so that had to be done for the inter-listed. That was pretty noncontroversial.
I think Canada's hedging itself a little bit by not lowering the access fee cap on the noninter-listeds. And maybe that was lobbying, maybe that's just curiosity, or maybe that's a little bit of intelligent design, meaning that-- maybe what they're trying to do is create a bit of a natural experiment.
So the noninter-listed names in Canada, generally, would be a little bit less liquid and probably lower cap than the inter-listed names, which tend to be your liquid large caps. And so arguably, if rebates do make a difference to liquidity provision, you'd probably want to have the bigger rebate on the noninter-listed names than on the inter-listed names.
Now, that's a big if, and I don't know if there's any evidence to show that rebates actually do increase liquidity. But I think if I was a regulator and that was a controversial question, maybe I would hedge myself in that way. So maybe that's what's going on there.
PETER HAYNES: Well, I will say that the noninter-listed cap went to 17 mills a few years ago, and we did not hear one word spoken about how that harmed liquidity provision. So I personally think it's a red herring. But we will see how that plays out.
Now Doug, some of your US exchange brethren have sued the SEC over its proposed market structure changes with respect to access fees and tick increments. And again, they're using the standard arbitrary and capricious regulatory overreach argument. Of course, this is happening from the exchanges because they have some concern that this change, as proposed, might harm bottom lines of the exchanges.
There has been some speculation that the new SEC administration, led likely by Paul Atkins, assuming he's confirmed in the Senate or by the Senate, will potentially repropose these market structure changes with a narrower focus. How are you expecting this to play out, Doug?
DOUG CLARK: Yeah, I think we're going to watch the court case. I do think that if you go back and read Paul Atkins work and if you talk to folks close to him, he was never a big fan of OPR. He's not going to get rid of OPR entirely, but I wouldn't be surprised if you-- in fact, I would be surprised if he doesn't go and take a page out of the Canadian book and put some sort of de minimis standard on OPR.
So protected markets will have to have some threshold of market volume, probably something like 2% is what I keep hearing. That can impact as many as nine different US exchanges that would suddenly not be able to collect SIP fees and you could see a reduction of some of the venues in the US. I've lost track, Peter, of how many new exchanges are coming to the US over the next couple of years, Dream in Texas and a bunch of others.
PETER HAYNES: 24, Green, MEMX2, just keeps happening.
DOUG CLARK: Yeah. So it would make it a little more challenging. Certainly, when we went to a de minimis size, it didn't impact any of the existing markets, but it did slow down new markets coming to our shores. So I expect that we will see that.
In terms of what we think is going to happen in that court case, I've got folks adamant on either side that exchanges are going to win, the SEC is going to win. I think we're just going to have to watch it play out. But I also think that there was, with a lot of the Gensler proposals, some nuggets of interest in the street, but the actual implementation was challenging.
And when you think about the tick regime one, I think most of the street felt that instead of being any stock that was 1.4 cents wide on average, it should have been something tighter. And instead of 2,000 names, it should have probably been, let's start with something that's going to get 200 or 300 names and see how that goes. So you may see a reduction in the scope of the change.
There are some externalities that come out of that change, particularly in message traffic. If all of your most liquid names suddenly have 3x message traffic, that's a challenge for the entire street. And if you can reduce the number of names and still just impact the ones that really are tick constrained, you can probably get a better outcome.
Whether Atkins wants to go back and go through all that and have to repass it, and then probably start with court cases anew, I'm not sure. We'll see how he goes with that. The one thing, and it's not on your list of questions, but I will say, the bigger thing that I think is going to come out of Paul Atkins will be on the digital side, digital assets, not so much the coins.
But I suspect before he even starts, you will see the SEC overrule Staff Accounting Bulletin 121, which is the funding rules for digital. And what those meant is that any bank that was holding digital assets didn't get credit for those assets, and they held all the debits of what they owed clients that owned those assets. And it meant that banks weren't interested in digital assets.
And that's tokenized real estate, it's tokenized money market funds, which are actually fairly active in the US in nonbank entities, but not at all in banks. And if that happens in Canada, to your earlier question about listings, we need to be really quick to adapt and to find ways.
And we've copied the advisory bulletin or the accounting bulletin up here, [INAUDIBLE] put that on the Canadian banks. We need to react and find ways to stay pace with them. If they start having tokenized money market and art and real estate, we can't lose the lead on that. We have, as a small market, the ability to be nimble. We need to be nimble on that, because I think that's the bigger market structure change that's going to come from Paul Atkins.
PETER HAYNES: Yeah. We'll have to watch that with keen interest. I'm going to finish up. We're going to talk about OPR in my final question here, and it's more of a thought experiment. So let's just put ourselves into a discussion around OPR where we know that Chair Atkins was a dissenter when Reg NMS was put in place in 2005, when he, at that time, was a commissioner. So let's think about an idea where Canada gets rid of OPR and gets rid of fair access rules, which Rob detailed earlier, and lets marketplaces innovate, do whatever they want.
Under this market structure, best execution becomes the benchmark, and we no longer have a focus on OPR. In your opinion, Rob, would this be a net beneficial for Canada's market structure?
ROB GOULEY: So Peter, if you were to ask me that question 10 years ago, I probably would have come back and said, no. The difference today, though-- the differences between trading in Canada and trading in the US are just-- they're diverging too much.
Doug was talking a little bit about US exceptionalism earlier, and I think that's important. I think it's time for Canada to go on the offensive. We need to respond, and we need to set ourselves up with a pro-business, pro-Canada regime.
And to your point, I think those are the two regulatory pieces that could be tweaked slightly that could really open up Canada for a lot of innovation, a lot of new capital coming in, a lot of new jobs here in Canada. I think if it's done carefully, and if the scope is narrow at first and then slowly allowed to be opened up more and more, I think it could be a really fun time to be involved in Canada's capital markets.
And so you can imagine a situation where Canada creates a third class of venue. A venue that perhaps has no OPR, to your point, best ex is the measurement which now allows brokers to choose whether they want to participate in some of these new innovative models or not. It also allows venues to throw away the burden of fair access, respond a little bit more nimbly and precisely to client demand.
You could segment the market. You could have counterparty selection. You could also open it up, to Doug's point, to tokenization and cryptocurrencies and digital assets. All of that could be contained in this new third class of venues with no fair access, no OPR, but still investor protection.
And I think you could do it in a way that would have limited harm on the rest of the marketplace that's already functioning well. I think at the very least, it's worth industry discussion about the pros and cons of considering that approach. But more and more, my own view is that maybe it's time to do this. Maybe it's time to unlock the innovation.
And Canada already has a regulatory framework around cryptocurrency. Not much came of it, but there was some regulatory action years ago. And so the pieces are there. I think if we all get together, we could make that happen.
PETER HAYNES: Well, the easy answer is, no, A, that's the problem. The easy answer is, no. The hard answer is to figure out how to make this work. And I think you deserve credit for thinking outside the box, Rob, and starting that conversation. We do know OPR is going to be definitely a topic in the US under Atkins in some way, shape, or form.
Last word to you, Doug. What would you think about a world where we had this new form of marketplace where there was best execution, first and foremost, no OPR, no fair access, trading alongside other Canadian venues.
DOUG CLARK: I'm somewhat for it. We already have markets that are not protected because they either have a speed bump or they don't hit the threshold for volume market share. So we've gone further than others.
The one thing I get a little concerned of when I say segmentation, segmentation that is quantitative in nature based on markets and some best execution is great. I'm always worried about the early days of the US. You had some brokers come together and create liquidity clubs, where broker A, B, and C will allow each other in their dark pool, but nobody else is allowed in.
I would hate to think that in our market you would have four or five dealers create a market where they trade with each other, but some independent doesn't have access to that liquidity. So I think you have to have guardrails.
But the notion of, let's not just be in that mindset of, here's what we've always done, so let's continue to do it. Let's actually think outside the box and try and pass the puck to where the world is going as opposed to where it's skating right now, is the mindset we should always have. So absolutely worthy of discussion.
PETER HAYNES: Well Rob, thanks for socializing it. Doug, thank you for your response. And to both of you, thank you for joining today for a great discussion on Canada, something that we need to pay attention to. It's too easy just to look past our borders. But I'm glad we were able to run through these topics in great detail.
So thank you, on behalf of TD, to both Doug and Rob for joining me today. And I look forward to seeing the feedback we get on this particular episode.
DOUG CLARK: Thank you.
ROB GOULEY: Thanks for having us, Peter.

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