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Buy-side Perspectives on Electronic & Algorithmic Trading in Canada: Vol. I of IV


Description: This study is a roadmap of the Canadian market for any firm wanting to increase market share, validate their existing strategy or develop a new one in the electronic trading space. Additionally, it provides tactical guidance for the execution of strategy.

This research represents a formalized, systematic and objective collection and summary of information from target audiences.

The report is also rich in verbatim commentary some of which undoubtedly is more candidly shared anonymously with a third party.

Methodology - Approach - The complete study was undertaken with buy/sell-side market participants, regulators, technology providers and marketplace operators. The data were captured through two avenues — 80 in-depth telephone or in-person interviews with target respondents, and a self-administered survey. The buy-side sample comprises 34 interviews representing 31 firms. The in-depth interviews explored participant experiences and perspectives on algorithmic trading within the Canadian capital markets context. The self-administered survey was designed to deliver hard numbers on algorithmic trading as a proportion of total trades and related information on execution venues, algorithmic strategies used, their impact on passive/active trading strategies, pricing, etc. Interviews were conducted over a 7 month timeframe to November 2006.

Some of the issues explored include:

- Competitor Information
- Gaps in current offerings and satisfaction with various vendors
- Technology implementation profiles
- Drivers and inhibitors of algorithmic adoption
- Current fees paid for various products & services (provided by the buy-side)
- Incidence of use of Transaction Cost Analysis (TCA) and associated vendors

The study is being used by:
- Large and mid-size broker dealers (both U.S. and Canadian) to validate and modify existing strategy. Selected clients include, ITG, Liquidnet, RBC Capital Markets, TD Securities and UBS. Feedback on its value is extremely positive.
- Marketplace operators to better understand the level of sophistication and growth potential for electronic trading in Canada.
- Regulators have purchased it as one input to policy development as the market continues to evolve in the electronic space in Canada.


Contents: Background
Research Methodology
Buy-side Technology Profile
Why Electronic Trading Systems and DMA?
DMA Issues
Algorithmic and Program Trading Defined
Are Algorithms Appropriate for Trading in Canada?
Algorithmic Trading Profile
What are Algorithm-appropriate Trades?
Incidence of Algorithms Used
Advantages of Algorithms for Trading
Disadvantages of Algorithms for Trading
Are Algorithms an Aid to Achieving Best Execution?
Are Algorithms Commoditized in Canada?
Do Algorithms Need to be Adapted to Canadian Market Characteristics?
Gaps in Algorithmic Product
Evolution of Algorithmic Trading in Canada
What is the Outcome of Increased Algorithm Use in Canada?
Trade Analytics
Criteria for Broker List and Trade Allocation
Consolidation of Broker Lists
Criteria for Electronic Trading Platform Vendor
Trade Routing: Broker versus Internal Execution
Trade Direction to the Broker
PM Involvement in Trade Execution
Buy-side Desire for More Control over the Trading Process
Pre-requisites for the Design/Use of Algorithms
Impressions of Leaders in the Algorithm Space
Perspectives on the Arrival of ATSs
Perspectives on the Elimination of Soft Dollars
What is Best Execution?
Perspectives on Regulator Involvement in Defining Best Execution
Who are the Dealers and Traders Executing Trades?
Conclusions
About Forefactor

Appendix I: Recent Developments
Appendix II: Glossary of Relevant Canadian Market Trading Rules
Appendix III: Buy-Side Discussion Guides
Appendix IV: Questionnaire

Figure 1- Direct Market Access (DMA) Usage and Vendor
Figure 2- Order Management System (OMS) Usage and Vendor
Figure 3- Execution Management System (EMS) Usage and Vendor
Figure 4- Financial Information Exchange (FIX) Usage
Figure 5- Real-Time Tick Database
Figure 6- Use of Anonymous (01) Broker
Figure 7- Proportion of Algorithmic Trades Executed Anonymously Versus Broker Identified
(Excl. 100% Algo Firm)
Figure 8- Proportion of Algorithmic Trades Executed Anonymously Versus Broker Identified
Figure 9- Algorithmic and Program Trading Defined
Figure 10- Are Algorithms Appropriate for Trading in Canada?
Figure 11- Proportion of Total Trade Activity (Excl. 100% Algorithmic Firm)
Figure 12- Proportion of Total Trade Activity by Channel
Figure 13- Algorithm Usage Via Direct Market Access (DMA)
Figure 14- Distribution of algorithmic Trading by Channel (Excl. 100% Algo Firm)
Figure 15- Distribution of Algorithmic Trading by Channel
Figure 16- Proportion of Algorithmic Trading Activity Within Channel (Excl. 100% Algo Firm)
Figure 17- Proportion of Algorithmic Trading Activity Within Channel
Figure 18- Proportion of Algorithmic Trades Executed in Canada, US and Other (Excl. 100% Algo Firm)
Figure 19- Proportion of Algorithmic Trades Executed in Canada, US and Other
Figure 20- Allocated Proportion of Trades at Open, Close, MOC & Worked Through the Day
(Excl. 100% Algo Firm)
Figure 21- Allocated Proportion of Trades at Open, Close, MOC & Worked Through the Day
Figure 22- Incidence of Strategies Used
Figure 23- Perspective on Incidence of Block Trading
Figure 24- Algorithms Contributing to Decline in Block Trading
Figure 25- Block and Non-Block Volume as a Proportion of Total TSX Volume
Figure 26- Average Non-Block Trade Size on TSX
Figure 27- Average Block Trade Size on TSX
Figure 28- Using Trade Analytics
Figure 29- Type of Analytics Used
Figure 30- TCA Vendors
Figure 31- Pre/Post Trade Analytics Vendors
Figure 32- Actual Pricing by Trade Type
Figure 33- Fair Pricing by Trade Type
Figure 34- Change in Number of Brokers Going Forward
Figure 35- Instructed Broker to Algorithm Trade
Figure 36- Expect Algorithm Disclosure on Broker Executed Trades
Figure 37- Incidence of Using Post Trade Transaction Analysis to Evaluate Algorithms
Figure 38- Desire for More In-house Control of Trading Process
Figure 39- Perceived Leaders in Canada - Number of Mentions
Figure 40- Perceived Leaders Among Bank Owned Broker-Dealers - Number of Mentions
Figure 41- Impact of ATSs on the Canadian Market
Figure 42- View of Soft Dollar Elimination
Figure 43- Should the Regulators Define Best Execution Going Forward?
Figure 44- All Dealer Mentions for All Trades
Figure 45- All Trader Mentions for All Trades
Figure 46- Dealer Allocated Largest Share of Algorithmic Trades
Figure 47- Trader Allocated Largest Share of Algorithmic Trades

Table 1- Are Algorithms and Aid to Achieving Best Execution?
Table 2- Factors Related to the Adoption of Algorithmic Trading in Canada


Companies Mentioned - TD Securities - Goldman Sachs - Merrill Lynch - UBS - BNY - Morgan Stanley - JP Morgan - Bear Stearns - ITG - Credit Suisse - Bloomberg Tradebook - E*Trade - Charles River - Belzberg - Instinet - Flextrade - Tradestation - Mtrade - Latent Zero - McGregor - Portware - Longview - Scotiabank - RBC Financial Group (RBC) - Bank of Montrèal (BMO) - CIBC, BlockBook - TriAct, PURE Trading - Sprott Securities (Cormark) - Genuity, GMP Securities - Canaccord Capital - National Bank Financial (NBF) - Raymond James - BGB - Interactive Brokers - TSX Group - Montrèal Exchange (MX)


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