TORONTO — Electronic stock trading in Canada is expected to increase dramatically in the next year as money managers complete the integration of automated order management and messaging systems, according to a new report.
"Eighty-seven percent of investment managers we interviewed are connected to an electronic trading system, but not many are actively using it," said Jackie Chung, principal at eClientscope Inc., Toronto, a financial industry consulting firm and author of the report. "However, based on the discussions we had, they plan to buy and sell more stock over electronic systems next year."
Of that 87%, most handle less than 20% of their equity trades electronically now. But next year, money managers overall are expected to use electronic methods to handle 20% of their stock trades, on average.
Ms. Chung found three reasons money managers are connected to electronic systems but not using them: internal technology constraints; soft dollar commitments; and lack of liquidity.
On the technology issue, she explained that most money managers have been putting in automated order management systems in the past 12 to 18 months, but their focus has been on connecting the trading desk and portfolio managers.
"Internal connectivity is in place for roughly 95% of them, and the next step is to do external connectivity to brokers and electronic trading systems," she said. "That part is under way."
Beyond technology, many asset managers buy research with soft dollars — effectively credits from trading commissions — and brokers and electronic trading systems in Canada do not yet allow for the use of soft dollars with electronic execution methods, she added.
The third issue preventing greater adoption of electronic trading is liquidity, or lack thereof.
"In Canada, we have the S&P TSX 60 index, and of those 60 stocks, only about 30 are liquid, according to traders," Ms. Chung said. "And because of insufficient liquidity in the public marketplace, it's difficult to use electronic trading."