Thursday, September 9, 2010

Need Another Reason to Trade Less?

Tom Bradley at Steadyhand reports that the Alpha Group (owned largely by Canada's big banks) is being investigated for conflicts of interest by the Investment Industry Regulatory Organization of Canada (IIROC). The concern is that your trades may not be executed at the best possible price.

The Alpha Group seek to divert trades from the TMX to the Alpha exchange. Their initiative aims at "establishing a market place driven by profit and the best interest of the industry." Of course, profits come out of traders' pockets.

I try to be wary any time I make trades, which isn’t very often. I check the bid-ask spread to make sure it isn't too wide, and I check that my trade is executed close to the appropriate price.  Most of the time I get the advertised bid or ask price, but occasionally I get a slightly better or worse price. However, I don't trade often enough to judge whether anything unusual is going on.

I would think that any extra profit by an exchange would come from either wider spreads or failure to execute trades at the advertised bid and ask prices. But who knows – businesses seeking higher profits can be very clever.

The incentive to try to extract a few extra cents from each share traded is powerful. We need a strong IIROC to prevent systemic abuses. As an individual, one of the best forms of protection is to trade less often.


  1. I have no problem with an alternate exchange as long as the liquidity is very high, and I guess by encouraging members (brokerages) to use the alternate exchange more, they will increase liquidity and reduce abuses.

    There ought to be a regulation that they must match or beat bids offered by the TMX, though. It just makes sense that investors shouldn't suffer losses by brokerages using their private trading network.

    Problem is, if brokerages primarily use the alternate exchange, liquidity in the main TMX will suffer, and the bid-ask spread will widen. Is this a case of unintended consequences, or does the Alpha Group just not care if investors' liquidity suffers? Complex issue.

  2. @Gene: I guess the potential conflict of interest gives us reason to fear that spreads on the alternate exchange won't be as good as they are currently on the TMX.

    @Larry: Currency conversion costs are a major concern. I've tried to figure out how these costs affect rebalancing strategy when holding assets in different currencies, but I haven't come to a conclusion.

    1. The second reply above is to Larry MacDonald's comment:

      Yes, costs matter and they are more than just the commission charged. The bid-ask spread is one sometimes overlooked. The one that gets me is the cost of buying foreign stocks -- the round trip fee embedded in the currency spread amounts to about 2%, which not only dwarfs the commission on the stock but is less explicit.