Of Note:


Tsk tsk  tsk....

I'm convinced the whole marketplace is set up to position the "retail trader" at a disadvantage - Starting with you're
very own online discount/investing broker!

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Canadian market regulators, seeking to ensure investors get the best deal when they place buy and sell orders for stocks

Potential for conflict created by the fact that the brokerages that dominate stock trading in Canada also own Alpha Group.

Alpha’s ownership structure is set up so that the firms that route the most trading to Alpha can earn additional shares in
the company.

IIROC is looking in particular at orders routed to Alpha first thing in the morning, before trading has opened for the day.
When trading kicks off, the prices on Alpha are often different than on the TSX, so in some cases clients whose orders
are sent to Alpha don’t get the best price.

Alpha also has no charge to brokerages for pre-market orders, while the TSX does.


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Banks face probe for directing stock trades

Boyd Erman

From Friday's Globe and Mail
Last updated on Friday, Sep. 03, 2010 7:32AM EDT

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Trading analysts at Alpha Trading Systems Inc. For The Globe and Mail


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Canadian market regulators, seeking to ensure investors get the best deal when they place buy and sell orders for stocks, are reviewing a plan by some of the country’s biggest stock brokerages to funnel more orders to a market they own.

The issue revolves around Alpha Group, the so-called alternative trading system set up in 2007 by a group of bank-owned brokerage firms to compete with the Toronto Stock Exchange. The idea behind Alpha was to force the TSX to cut prices for services such as trades by creating a serious competitor.

As early as last April, Alpha asked its backers to join a plan to switch some orders from other markets such as the TSX to Alpha to make it busier. The program was called the “Momentum Initiative.”

That program has now drawn the scrutiny of regulators. The enforcement division of the Investment Industry Regulatory Organization of Canada (IIROC), the self-regulatory group of the brokerage industry, sent a letter dated Aug. 13 to brokerages asking them to explain how their participation in the Momentum Initiative worked. The letter is believed to have gone out to all the brokerage firms that own stakes in Alpha, sources said. The firms were given a week to respond.

Alpha’s ownership group includes Royal Bank of Canada, National Bank of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, Canaccord Financial Inc., Bank of Montreal, Desjardins Group and Canadian Imperial Bank of Commerce, as well as the Canada Pension Plan Investment Board.

The review comes amid a push by regulators to ensure that investors get what is known in the industry as best execution – the best possible handling of their order no matter what market it’s on. Last month, in another matter, IIROC reached a settlement with BMO Nesbitt Burns, which agreed to pay a $250,000 fine for not making strong enough efforts to guarantee that clients got the best price.

The review of Momentum also highlights the potential for conflict created by the fact that the brokerages that dominate stock trading in Canada also own Alpha. They must balance their duty to get the best price on stock trades for clients against the desire to send trading orders to Alpha, which may not always have that price.

That tension is evident in a slide from a presentation to Alpha shareholders last year at a meeting at which Momentum was discussed. Among the objectives laid out for the brokerages is “establishing a marketplace driven by profit and the best interest of the industry.” Also, Alpha’s ownership structure is set up so that the firms that route the most trading to Alpha can earn additional shares in the company.

The Momentum plan was controversial even among Alpha’s owners. For example, CIBC World Markets, the busiest trading house in Canada and Alpha’s largest shareholder, is said by two people familiar with the situation to have shunned the Momentum Initiative.

As part of the review, the IIROC letter asked firms to provide copies of “procedures that outline a process designed to achieve best execution.” The letter said the review is for “information purposes” and sources said it’s not clear that it will lead to any enforcement action. IIROC spokeswoman Connie Craddock declined to comment on the regulator’s actions.

IIROC is looking in particular at orders routed to Alpha first thing in the morning, before trading has opened for the day. When trading kicks off, the prices on Alpha are often different than on the TSX, so in some cases clients whose orders are sent to Alpha don’t get the best price.

Alpha chief executive officer Jos Schmitt said the Momentum program is within the rules. It was designed as “an initiative to ignite liquidity in securities on our market,” he said. He acknowledged that prices often differ between the TSX and Alpha at the open, and that there are winners and losers from that. “On the opening, you will have people who have a better opening price and people who are a little bit worse.”

However, he stressed the benefits of moving orders to Alpha. He cited figures that show that the emergence of Alpha and competitive trading venues to rival the TSX has resulted in narrower spreads between bids and offers and more active trading, which benefit investors. Alpha also has no charge to brokerages for pre-market orders, while the TSX does.

Sources said the counterargument from brokerages is likely to be that it's impossible to tell before the markets open which will have the best prices when trading begins. Brokerages also say that the regulators' rules around the pre-market routing of orders are unclear, leaving a grey area.

“This [Momentum] is about providing clients with access to greater liquidity, tighter quote spreads and best execution,” said Greg Mills, head of global equity markets for RBC and the chair of the equity markets committee of the Investment Industry Association of Canada. “We at RBC support the initiative because of these benefits to clients, and because it's a cost-effective solution for the industry.”

Officials at other brokerage firms declined to comment Thursday.

The Globe and Mail



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