Managing The Entry of ATSs
IN PRINT ARCHIVE CIR Summer 1999
|Managing the entry of ATSs|
Technological advances have changed the way in which stock markets are perceived and the way in which trading is conducted. Competition for order flow is a growing feature of the current stock-trading environment.
The need to develop an appropriate regulatory framework in Canada for competing liquidity pools is essential. Our markets are fragmented and are becoming less transparent. The proposed restructuring of the Canadian stock exchanges could reduce the level external market fragmentation. However, the fragmentation of our markets could indeed accelerate if we don't properly manage the introduction of alternative trading systems (ATSs) to the Canadian market.
In drafting new regulations, for how ATSs are regulated in Canada, it is important that a central authority be responsible for overseeing the functions of the various trading systems to ensure they adhere to minimum standards. A market consolidator should be responsible for maintaining post-trade information, so that common confirmation of transactions is maintained for the public record and trading benchmarks. The consolidator could be an existing exchange with established skills and expertise in this area, such as the TSE, or a new commercial entity.
There are many advantages in opening Canadian capital markets to ATSs. Chief among these is flexibility as different trading channels become available for different users. The presence of ATSs should foster innovation and also encourage the development of faster, more complex, yet less costly, trading mechanisms.
There are also several potential drawbacks to the introduction of ATSs. These include the possibility that retail investors will be further disenfranchised, if rules governing the priority of trade execution are debased. Additional issues include those of whether or not ATSs would bear their fair share of regulatory and surveillance obligations, the costs associated with original and continuous listings, as well as the costs associated with the price discovery process.
There is no doubt that the entry of ATSs into the Canadian market will foster innovation and increased competition. This may result in more competitive pricing, but could also result in lost liquidity and efficiency, if the aggregate market becomes less visible and fragmentation of information from competing systems is not managed properly. Balancing the needs of competing interests, and developing a framework that is both fair and equitable to all players, remains the biggest challenge for Canadian regulators.
Eric Kirzner is a professor, Rotman School of Management, University of Toronto.