A TMX Group sign, the company that runs the Toronto Stock Exchange (TSX), is seen in Toronto, June 23, 2014.Mark Blinch/Reuters
The faster new computers at the Toronto Stock Exchange are leading to more noise in the stock markets caused by orders that disappear, researchers at brokerage firm ITG Canada found in a study.
TMX Group Inc., owner of the TSX, rolled out the new "Quantum XA" trading computers in stages earlier this month, enabling ITG to look at the week of June 9th to June 13th, when about half the stocks on the TSX were being traded on the older, slower system and half on the much faster new system.
"This has given us a rare, admittedly short, natural experiment with which to observe the impact of [faster] trading engines on a marketplace," ITG wrote. The analysts at the firm observed these effects:
– Stocks trading on the new engine have significantly more fleeting orders – i.e. orders that are cancelled a fraction of a second after they are placed – and that the "vast majority" of such orders come from brokers that ITG characterizes as "the most HFT-friendly firms."
– The order-to-trade ratio for stocks trading on the new engine increased on both the TSX and other markets, but the ratio did not increase for stocks still trading on the old engine. In other words, there were more orders for every trade on the new engine, suggesting more cancelled or changed orders.
– The TSX lost volume market share on stocks that had migrated to the new engine, but not on those still on the old engine. This may suggest some folks are wary of trading on the new engine.
What does that signify? It could be that the much faster trading speeds on the new engine were encouraging high-frequency traders to see a trade on the faster new TSX system and race ahead to act on that information in other, slower stock markets. The new trading system has reduced the turnaround time on an order by 98 per cent compared to the older system, ITG said.
"This is a significant reduction in the 'head start' a [market] participant has when taking liquidity on multiple venues, and should increase the ability of the fastest players to react to trades on the TSX."
Arguably, investors who don't want to use such strategies might not want to trade on the TSX's new engine, because it would give away their intentions on other, slower markets.
There's one thing to keep in mind here: ITG is an investor in Aequitas, a new Canadian exchange that is hoping to win business from traders who are concerned about such strategies.
There's also another caveat, as ITG itself noted. "The sample set in question is, as a result of the short term nature of the migration period, too small to be 100 per cent sure of any of these conclusions."