As more Canadian firms turn to algorithmic trading tools, U.S. players dominate the market.

The Canadian electronic and algorithmic trading markets are approaching a tipping point according to recent research from Forefactor, a Toronto-based research and consulting firm. Forefactor’s president Renee Colyer says that while many still describe Canada’s capital markets as “blocky and illiquid and therefore not suited for algorithmic trading,” in fact the opposite is true.

According the latest report, “Perspectives on Algorithmic and Electronic Trading in Canada: Integration, Opposition, Evolution,” the adoption of electronic systems and algorithmic trading tools is on the rise by our neighbors to the north and U.S. offerings are catching on.

“There is an increasing level of buy-side sophistication and a desire to increase control over the trade,” says Colyer, adding that Canadian traders are realizing the advantages to these algorithmic tools. “There is less potential for a loss of communication or miscommunication and they can realize commission discounts as well.”

In addition, Jeannette Tanguay, senior associate at Forefactor, says that foreign investors are playing in the Canadian markets more and more, bringing in their algorithmic advantage and forcing a change on the field. “They feel comfortable coming into the market and using those tools and it seems to be affecting the dynamics of the market,” says Tanguay. “The Canadian traders are realizing they need to alter their trading strategies as well where those tools are being used.”

While some might not be happy with the algorithmic movement, they’re jumping on board rather than be left behind. “Even large pension funds that had negative things to say about algorithmic trading admit they can see they have to adjust their trading styles to account for the fact that algorithms are being used to trade,” she adds.

While Canadian traders ramp up their algorithmic capabilities, it seems U.S. players will continue to dominate the market providing the necessary offerings. According to the research, Colyer says Canadian firms tend to partner with U.S. broker/dealers to leverage their offerings. “It’s a better business model to partner with U.S. firms to gain access to a wider distribution network and tap into the expertise they already have.”

Although leveraging the deep pockets of U.S. players, Colyer sees the Canadian players coming in to offer more customized solutions tailored to the nuances of those markets. “It makes more sense to bolt onto an existing multi-broker platform and gain access to that distribution, rather than setting one up on its own,” she adds.

By Cristina McEachern

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