Can we call a truce in the trader-TMX war?

Share

A war of words is bubbling up on Bay Street between disgruntled traders and the country's all-powerful stock exchange. In the name of good Canadian manners, it's best we take a timeout before it boils over.

Once again, a growing number of sell-side traders are furious with TMX Group Ltd., which runs the Toronto Stock Exchange. The last time we saw such animosity was just before the financial crisis, when many of the same players were incensed over the TSX's effective monopoly, arguing it gave the company free rein to charge ludicrous transaction fees.

Fed up, a handful of investment dealers combined forces to build the alternative trading venue Alpha. What resulted wasn't exactly a truce, but the worst tempers certainly were calmed.

Sadly, the market's evolution has soured relations between Bay Street and the TMX again, and this time the fight is arguably even more rancorous than the last.

You might expect the divide to have something to do with topical market issues. There's the rise of high-frequency traders, the recent order protection rule and the rerouting of retail trade orders to the United States.

This runs deeper than that. It's the same old gripe over the TSX's market power. Ever since TMX Group was taken over in 2012 in a deal that also saw the company acquire Alpha, the TSX's dominance in the Canadian marketplace has arguably become as oppressive as before.

To be fair, TMX doesn't have an all-out monopoly the way it once did. Canada now has a number of alternative trading venues that compete with it in some form. However, the exchange operator still handles the lion's share of trading volume in this country. And that market power has left the relationship between TMX and traders looking torn and frayed.

For instance, last fall, the TMX launched a vigorous campaign to prevent retail traders from sending their orders to the United States – going so far as to call it the biggest issue in equity markets today.

Furious, the retail traders privately griped that they wouldn't have to do so if the TSX's transaction fees weren't so high. If they could trade here and get a better price for their clients, they say they happily would.

Because the TSX remains such a dominant player, we've seen the same pattern emerge as the one that materialized pre-crisis. Most notably, a number of investment dealers have banded together to launch Aequitas, a brand new Canadian exchange.

This time, people are skeptical that Aequitas will change the status quo very much. Alpha came and went, after all. What we need, then, is a public debate about the state of the markets, one where both traders and the TMX drop the spin.

For example, the TMX uses aggressive language when spelling out the problems with U.S. retail orders but glosses over the fact that it is terrified of seeing its trading volumes dwindle. To lure new companies to go public or list on its exchanges, the operator needs to prove that its markets will provide them with a lot of liquidity.

More than that, TMX can't afford to watch another Canadian giant delist from one its exchanges the way Lululemon Athletica Inc. did. Just last month Imax Corp. left the TSX – what if BlackBerry Ltd. went next?

Meanwhile, what traders happily leave out of their arguments is that Canadian banks have been struggling with how to make money off retail trades ever since Royal Bank of Canada slashed its retail trading commissions in December, 2013, to try to win market share from Toronto-Dominion Bank. Because every online brokerage followed suit, the banks have had to scramble to make up the lost revenue.

Ironically, the traders often forget that, post-TMX takeover, it's not them against the exchange any more. If they work for a Canadian bank, there's a good chance their employer has a stake in Maple Group Acquisition Corp., the consortium that bought TMX Group. In other words, fighting TMX is like fighting a different division of their company.

For now, the best referee might be hard facts. Data on hot-button trading issues in Canada are relatively scarce. For years no one knew how much Canadian trading volume stemmed from high-frequency trading, leaving much of that debate pointless.

The same is true with U.S. orders. The TMX can fear-monger with threats of mass retail trades being sent to the U.S., but the truth is that no one knew how much was being sent south of the border before the regulators issued a stern warning – not even the traders.