Explore the dynamic shift towards technology and strategic liquidity in Canada's equity market
The Canadian equities market is undergoing significant transformations, with a strategic shift towards electronic trading and an emphasis on sourcing liquidity, particularly for small- and mid-cap stocks.
Coalition Greenwich's research, titled ‘Northern Lights: Illuminating Trends in Canadian Equities,’ revealed that Canadian portfolio managers allocate approximately half of their budget to sales and research, with just over a third dedicated to sales trading and agency execution.
Interestingly, there has been a slight decrease in the number of execution brokers used by Canadian buy-side managers, averaging 20.6 in 2023, down from just under 22 in previous years. This shift indicates a strategic refinement in their approach to market engagement.
Furthermore, the research highlights a reduction in the number of equity research providers to an average of 13.6, from 15.3 over the past three years, suggesting a more focused and perhaps more strategic selection of research partnerships.
Commission Sharing Arrangements (CSAs) play a significant role in this ecosystem, with 61 percent of Canadian managers employing these arrangements to compensate brokers, third-party research providers, and other vendors, underscoring the importance of efficient commission use in the trading strategy.
Liquidity sourcing and commission allocation receive considerable attention, with a prominent emphasis (37 percent) placed on sourcing natural liquidity. This focus reflects the market's shift toward transactions that are considered "natural" interactions between buy-side institutions.
Despite this, capital commitment, accounting for 14 percent of the overall commission allocation, remains a vital component of the Canadian buy sides’ workflow.
The landscape of electronic trading is also highlighted, with its share increasing from 28 percent in 2021 to 32 percent in 2023, highlighting a growing reliance on technology-driven trading solutions.
Broker concentration in this market shows a relatively stable pattern, with the top broker receiving about 19 percent of the flow, and the top five brokers collectively capturing over 60 percent of the buy side’s order flow by notional value traded.
This stability reflects a deliberate alignment in broker selection, aiming to consolidate order flow to a select group of providers offering a comprehensive range of services.
The increasing importance of sourcing natural block liquidity in small/mid-cap names is particularly noteworthy, more than doubling from 10 percent in 2022 to 24 percent in 2023. This shift underscores the unique challenges and opportunities presented by the Canadian equity market's focus on these segments.
Corporate access and research coverage also reveal interesting trends, with 42 percent of one-on-one corporate access meetings occurring at broker conferences and a significant preference among portfolio managers for stock research that encompasses both Canada and US markets, indicating a more integrated North American market perspective.
As the Canadian equities market continues to evolve, these insights reflect a dynamic interplay between electronic trading, liquidity sourcing, and strategic broker relationships.
The focus on efficient commission utilization, the strategic reduction in research and execution partners, and the increasing reliance on electronic trading platforms highlight a market in transition, aiming to leverage technology and strategic partnerships to navigate the complexities of today's trading environment.