On September 21, 2015, TSX Alpha Exchange in Canada implemented a randomized systematic order processing delay of 1 to 3 milliseconds against all marketable orders (otherwise known as the "Alpha Speed Bump"); and a minimum posting size of 500 shares for post only non-marketable orders to avoid the speed bump. Also, the exchange fee structure was changed to the "inverted" maker-taker pricing model.
This MQD case study provides insight into the changes in market quality on the Canadian markets. The Market Quality Dashboard produces 100+ efficiency and fairness metrics on a continuous basis for 60+ major trading venues (inclusive of derivatives venues) across the world based on intraday time and sales data collected from Thomson Reuters. This page displays a subgroup of these metrics. For more details, please read the background paper “The Value of a Millisecond: Structural Segmentation of Uninformed Order Flow” written by Haoming Chen (CMCRC PhD Student), Sean Foley, Michael Goldstein and Thomas Ruf. The study finds that TSX Alpha’s speed bump enables HFT liquidity suppliers to selectively avoid trades that originate from smart order router sprays, which are more likely to be informed and impose instantaneous adverse selection costs.
Concurrently, the combination of inverted maker-taker pricing and minimum posting sizes creates an attractive venue for retail brokers, who receive a rebate on active orders and are more likely to find sufficient liquidity to immediately fulfil trading requirements. As TSX Alpha attracts uninformed trades and avoids informed trades, the toxicity of order flow remaining on the other stock exchanges increases. Hypothetically, liquidity suppliers pass on the higher adverse selection costs via wider effective spreads, resulting in deteriorating market quality. Using the six metrics described below we show what actually happened and allow users to weight each measure to get an overall score on market quality change for the various markets in Canada.
Choose the markets and / or indices to display in the charts below from this menu:
This table gives an indication of the change in direction in the score for each market and metric after the speed bump event on 2015-09-21. All days in the selected date range are used.
- An increasing arrow indicates an increasing score. A higher score may be associated with increased market share, or a decreased spread, for example.
- Custom weights can be specified in the text boxes to alter the impact of that metric in the overall score per market and group.
How is the overall score calculated?
The chart below shows the change in overall score over the entire date range.
On-market Volume Share (%) – The percentage of each trading venue's total on-market trading volume over the consolidated trading volume. This shows a decrease in traded liquidity on Alpha. Along with the increase in displayed liquidity, this has caused liquidity to become harder to access.
Order to Trade Ratio – The ratio of number of orders (depth data) over the number of trades (quote and trade data). This shows an increase in HFT liquidity supplier activity on Alpha.
Absolute Effective Spread – The signed difference between trade price in each trading venue and the prevailing midpoint, measured in cents. This metric is value weighted. This shows an increase in transaction costs for Alpha.
Absolute Realised Spread – The signed difference between trade price in each trading venue and NBBO midpoint after a grace period, which is currently set as 10 seconds, measured in cents. This metric is value weighted. This shows an increase in profits for liquidity suppliers for Alpha.
Percentage of time at national best bid offer (NBBO) – The percentage of time each exchange is at national best bid and ask. This metric is volume weighted.
NBBO Depth Share (%) – The percentage of quoted bid plus ask volume when each exchange is at NBBO over the total quoted bid and ask volume. This metric is value weighed. The results below show an increase in displayed liquidity for Alpha.