Toronto Stock Exchange (TSX)Sami Siva
For generations, Canadian investors have taken their cues on equity markets by checking where a company is trading on the Toronto Stock Exchange.
Investors need to change their ways, because the venerable TSX no longer tells anything close to the whole story about a stock.
Rival exchanges - there are five alternative trading networks where investors can buy and sell TSX -listed stocks - now routinely account for more than a third of trading in many stocks. The leading upstart, three-year-old Alpha Group, accounted for 27 per cent of trading among TSX-listed stocks last week.
Companies that are widely-held, household names experience some of the most fragmented trading, with a number of venues splitting the traffic in stocks such as Bombardier, Manulife Financial, TransCanada and Suncor, according to a recent study by ITG Canada directors of research Alison Crosthwait.
"In many names, more than 30 per cent of the volume is trading on venues other than the TSX," said Ms. Crosthwait. "These results highlight the need to access all possible executive venues to maximize true tradable liquidity."
To get better information on stock prices, investors look to dealers, who are supposed to pull together everything that's going on in markets when buying or selling shares for their clients. And this brings us to one of the dirty little secrets on Bay Street: Many dealers were slow to upgrade their technology over the past three years. They haven't built what's known as the smart order routers that can collect stock price data from every possible marketplace. These networks are expensive, and when alternative trading systems were marginal players, a brokerage house could rely on the TSX for information. But that era has now passed.
"Smart order routing that posts on multiple venues and dynamically responds to liquidity and price events is essential to address fragmentation in Canada," said Ms. Crosthwait.