This content is from: Portfolio

Arbitrage Opportunities On Toronto Stock Exchange?

When traders discover a new currency play or a dual stock listing they jump in with both feet. And that’s precisely what Toronto-based Omega ATS, an off-exchange alternative trading system (ATS), is hoping will happen.

Market information spans the globe faster than most people can think. Together with ever-imaginative trade scenarios there's scant chance left for traders to buy low and sell a little bit higher. So when traders discover a new currency play or a dual stock listing they jump in with both feet. At least that's what one trading venue in Canada expects will happen.

Toronto-based Omega ATS is an off-exchange alternative trading system (ATS), which allows dealers to trade securities listed on the Toronto Stock Exchange (TSX) at, the company claims, greater speeds through a very fast matching engine and at lower transaction costs. Canadian regulators have mandated that dealers expose orders to all bids whether on or off exchanges, in order to achieve the best execution. Omega plans to add US-listed securities denominated in Canadian dollars next month, saving dealers exchange fees, boosting trading – and so adding market liquidity – and providing hedge funds and high frequency traders (HFT) with arbitrage plays, too.

On March 15, the low latency provider announced that its subscribers would be able to trade US securities, quoted in Canadian dollars. In the future it wants to expand its foreign instruments offerings to include “any CDS-eligible security traded on a highly trafficked US exchange,” Omega said in its release.

Some of the new order flow is expected to come from pension plans. Last year, Canada's regulators dropped their rule that had limited the securities in the country's Retirement Savings Plans (RSPs), similar to 401(k) plans in the US, to just 20% of foreign issues. Also, prior to this, Canada's plan managers had had to maintain two books; one for trading the shares in US dollars and another for Canadian dollars, paying $125 just to maintain each broker account. Liquidity was low too, forcing managers to contend with spreads as high as 3%.

With the restrictions dropped and Omega able to offer the US listings to traders without the hassle and expense of currency conversions, Mike Bignell, Omega's president and chief compliance officer (CCO), expects increased trading interest. The new listings, which initially will include Bank of America, Google, and Microsoft and several ETFs that trade on venues like NYSE, NASDAQ and AMEX, should be soon followed by more, says Bignell. Also, he says, “There's a big arbitrage component to this at the end of day.”

Bignell is not aware of any market currently trading the above US-listed instruments in Canadian dollars anywhere in the US. Therefore, he says, Omega ATS will provide “another toy that arb traders could use to trade. For example, Apple.” In the U.S. the popular stock sells in dollars and on Omega ATS it will trade in Canadian dollars. “So for dealers,” says Bignell, “it could be very exciting – a different market to add to their arb portfolios.”

The TSX tried unsuccessfully in the past to generate arb interest in the currency pair, says Renee Colyer, founder and CEO of Forefactor, a market research and consulting company in Toronto. But, she notes, that was “before high frequency trading became popular.” Colyer, who designs and conducts independent research to provide commentary and recommendations on industry trends in the capital markets, says, “If it's a low cost solution, Omega's addition of these Canadian dollar-traded US securities could appeal to small hedge funds, especially broker/dealers, small HFT traders, and small currency arb traders. It would be an opportunity for them.” Colyer predicts little interest on the part of “bigger shops with access to high speed currency conversion. For small HFT and hedge guys, it could make sense. But it probably won't drive traffic from institutional investors.”

Related Content