Canadian Equities Exchanges Today
Cboe North American Equities Execution Consulting team has previously explored U.S. market trends across a variety of execution venues, both on-exchange and off-exchange. In the latest analysis, our team takes a closer look at the Canadian equities trading landscape, delving into key aspects, such as internalized executions, interlisted securities volume trends, and addressable continuous market share, after factoring out intentional crosses and auctions. At the same time, we examine how Cboe’s Canadian equities marketplaces have held a strong position in this dynamic ecosystem.
Canadian Equities Market Overview
Following the market volume highs of the early days of the pandemic, the average daily volume (ADV) traded in the Canadian equities market has gradually declined over the past three years. When comparing 2022 to 2023 year-to-date, ADV had a year-over-year decrease of 17% and stayed at 841 million shares on average in the third quarter of 2023. Meanwhile, the market share of closing auction and intentional cross trades has grown continuously as a percentage of overall market volume during the same time period.
As of October 2023, closing auctions comprised 8.9% of total market volume while intentional crosses made up 8.7% of total market volume. An intentional cross is a pre-arranged trade entered by the same dealer for both buy and sell positions at the same time and price. It represents inaccessible liquidity since it does not interact with other orders.
Source: CIRO, Cboe
The Canadian equities trading landscape is characterized by its diverse array of marketplaces, including maker-taker, inverted, and fee-fee trading models, in both lit and dark markets, each with its own unique market structure. Maker-taker venues maintained an average of 75% market share from 2022 to 2023 and inverted books experienced a slight decrease in market share since the beginning of the pandemic, stabilizing at around 20% in 2023. Meanwhile, pure dark market share climbed to 5.5% in the current year, up 90 basis points (bps) year-over-year.
In Canada, equities trading venues are either alternative trading systems or exchanges. Both are deemed marketplaces and subject to similar transparency requirements under applicable securities laws and regulations. More details regarding classification and the differences among Canadian equities trading venues are reflected in the table below.
Source: OSC, CIRO
The concept of an internalized trade, which is executed by the same dealer as both the buyer and the seller, plays an important role in Canada, with a total market share of approximately 20.7% in October 2023. This figure does not take into account trades involving the anonymous trading marker, whereby different dealers or the same dealer could be participating underneath. A trade can be internalized on a marketplace, intentionally through the execution of an intentional cross, or through an unintentional cross aided by broker preference-based matching priority.
Source: CIRO, Cboe
Intentional cross market share has consistently increased since 2020, accounting for 6-7% of the total market volume in 2021, 7.8% in 2022, and 8.7% in 2023. Approximately 50% of intentional crosses are executed on the Nasdaq CXC exchange. Cboe Canada’s equities’ market share reached a low point in 2022 at 19.3% but has rebounded to 27.1% year-to-date in 2023.
Unintentional crosses, which make up about 11.7% of total market volume, involve the execution of a trade where the two distinct orders are from the same dealer, but where there has been no coordination. Available on most marketplaces, broker preferencing within the matching logic gives queue priority to passive orders to match and trade against incoming orders from the same dealer first, even ahead of orders at the same price with time priority originated by other dealers, resulting in unintentional crosses. Broker preferencing increases the likelihood of internalization, but trading anonymously results in the loss of this advantageous feature. The market share of unintentional crosses across various marketplaces closely mirrors the broader trend in overall volume market share.
The Addressable Continuous Market
We characterize addressable continuous trading as liquidity that is immediately accessible, which excludes intentional crosses and opening and closing auctions. The addressable ADV, stands at 729 million shares as of October 2023, reflecting a decline from the 914 million shares observed in 2022. When expressed as a percentage of total market volume, it also exhibited a gradual decrease over the past two years, declining from 88% at the close of 2021 to 80% in the third quarter 2023. This trend aligns with the discernible growth in the market share of intentional crosses and closing auctions, as depicted in the initial chart.
Notably, when intentional crosses and open/close volumes are excluded, Cboe Canada captured an average addressable continuous market share of 15.7% in the third quarter 2023. This places Cboe Canada a mere six basis points behind Nasdaq CXC, indicative of a consistent narrowing of the gap with Nasdaq CXC throughout 2023.
Interlisted securities, denoting those dually listed on both U.S. and Canadian exchanges, also had stable trading volume within the Canadian markets over the past two years. These securities now account for 30% of total executed volume in Canada, a 9% increase from 2021, and they now comprise 60% of total notional value traded. In the U.S., these securities represent 3% of total executed volume this year. Both Canadian and U.S. markets experienced a volume surge for interlisted securities in September 2023, with a notable 56% and 28% increase in ADV, respectively.
As of October 2023, the combined ADV for interlisted securities averages 611 million shares across both countries, compared to 700 million shares in the prior year. Of this combined total volume, approximately 45% is traded in Canada and 55% in the U.S. As illustrated in the chart below, the U.S.-Canada volume split, which has been narrowing since the end of 2022, exhibited a recent divergence in the third quarter 2023.
As of October 2023, interlisted stocks in the U.S. have an average executed share size per trade of 366 shares, which is 13% larger than in Canada where the average is 318 shares, when excluding odd lots. Conversely, in Canada, the average trade size for odd lots is 30 shares, 22% larger than the equivalent in the U.S. markets.
The market share of interlisted stocks has remained stable across various exchange groups in Canada in recent years. Between third quarter 2022 and October 2023, Cboe Canada’s interlisted market share exhibited a consistent upward trajectory, rising from 9.4% to 13.14%, respectively. Notably, Cboe Canada’s maker-taker lit book, NEO-L, has performed very competitively in (National Best Bid or Offer) NBBO presence time for interlisted securities, routinely ranking second or third with orders at the inside 42% of the time. Additionally, Cboe Canada offers NEO-listed Canadian Depositary Receipts (CDRs), which provide access to a wide range of popular publicly listed U.S. companies denominated in Canadian dollars through fractional share investments in U.S. stocks. This expansion provides investors with a broader range of investment options between the U.S. and Canada.
The Canadian equities trading landscape has a diverse set of trading venues that cater to a wide range of marketplace participants and trading strategies. In this dynamic ecosystem, Cboe Canada, with the support of its parent company, strives to provide a range of functionalities across various trading books to meet our clients’ needs. This commitment is exemplified through our primary maker-taker venue, NEO-L, primary listing exchange for ETFs, corporates, and CDRs, with priority for natural investors as retail and institutional flow. Cboe Canada’s inverted venue, NEO-N, features a unique speedbump and size-time matching priority with combined determinants of time, last fill, and order size. NEO-D, a dark market with a taker-maker fee model, differentiates retail flow from the others and provides opportunities for price improvement. MATCHNow, Canada’s largest dark pool, offers enhanced block trading services and buy-side access via Cboe BIDS Canada. The analysis of market trends here also shows Cboe Canada has maintained strong market share in intentional crosses, addressable continuous trading market share, and trading of interlisted securities since 2022. We remain committed to our ongoing efforts to deliver quality solutions, ensuring Cboe Canada plays an integral and responsive role in the Canadian equities market.
Please reach out to your Cboe North American Equities representative for questions or to learn more about optimizing your trading strategies.