TSX Alpha is one of Canada’s only two speed-bump exchanges, which are set up to protect retail investors from high-frequency traders. However, a study from Australia titled The Value of a Millisecond
is questioning whether the TMX-run exchange is actually doing that, according to a report from the Globe and Mail
The article explains that TSX Alpha speed bump puts a 1-3 millisecond random delay on almost all orders received by the platform; however, traders who pay higher fees can bypass this delay by submitting “post-only” orders – an order they can enter and cancel at will.
“One to three milliseconds is enough time for the fastest traders to survey the rest of the market and decide whether they should keep their order in play,” said the article. Having the chance to cancel their order when a more sophisticated one comes in gives such traders an edge, and Alpha’s model also makes it more expensive for large Canadian pension and mutual funds to manage their clients’ portfolios, according to the study which used public data.
University of Sydney finance professor and lead author Sean Foley estimates that Alpha’s speed-bump model has added $105 million in extra costs to the Canadian equity markets since its September 2015 introduction. “If you read the Alpha material, it says ‘We’re trying to protect people from predatory HFT.’ And it’s like, ‘Really, or are you trying to facilitate predatory HFT?’ Because that’s what it looks like,” he said in an interview.
TMX said it is “highly skeptical” of the paper’s conclusions, citing “significant flaws in the approach taken” – a criticism echoed by Canadian market structure expert Andreas Park from the University of Toronto. “There’s a question about whether or not the guys who manage retail flow are negatively affected,” he said.
Alpha is also relatively small, handling roughly 6% of total trading by volume in September. “We built Alpha to have a very specific value proposition,” said Kevin Sampson, managing director of equity trading at TMX. “Those who don’t find value in the model are not required to trade on Alpha.”
Foley has presented his findings to the OSC, which said it would be premature to comment on the study. “We have been receiving data from Alpha and performing our own work about the impact of the model and Prof. Sean Foley’s paper is an input in our analysis as we continue our review,” said OSC Director of Market Regulation Susan Greenglass.
Many brokers to whom Foley has presented his findings weren’t surprised. “That is what it was designed to do and what we all knew it was going to do,” said Rizwan Awan, head of quantitative execution services at BMO Capital Markets.
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