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Trading on Toronto Stock Exchange – Best Execution Without Borders

Trading on Toronto Stock Exchange – Best Execution Without Borders. CSTA Conference August, 2006 Stan Grunzeweig Stan.grunzeweig@tsx.com 416.947.4724. OBJECTIVES Guidance to expanding North Bound Order flow .

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Trading on Toronto Stock Exchange – Best Execution Without Borders

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  1. Trading onToronto Stock Exchange –Best Execution Without Borders CSTA Conference August, 2006 Stan Grunzeweig Stan.grunzeweig@tsx.com 416.947.4724

  2. OBJECTIVESGuidance to expanding North Bound Order flow Empower Canadian broker-dealers with means to encourage US-originated trading in Canada. WHY SEND FLOW TO CANADA? • Trends in Canadian Capital Markets • What Americans don’t know about trading and liquidity in Canada HOW IS FLOW SENT TO CANADA? • DMA: DMA vs. Sponsored DMA • Sponsored DMA - Introducing Canadian Broker (PO) • What Canadian POs need to know about Connectivity and Compliance

  3. MARKET TRENDS: Americans Increasingly Interested in Trend Away From Relationship Trading Towards Electronic Trading Relationship Trading • Traditional: Large blocks, buy & hold, baskets • Will continue Electronic Trading • Growth area • Type: Program, Algo, Arb, • Desk: Proprietary, Hedge • Buy side: Control, speed, turnaround, instant analysis

  4. S&P/TSX Venture Composite S&P/TSX Composite NASDAQComposite Dow Jones Industrial Average What Americans Need to Know • Avg. trade size of 700-800 shares on TSX, vs. 350-400 on NYSE/NASDAQ* Canada is a growth market for automated trading strategies >> opportunity to apply algorithms developed for US markets and seek Canadian Liquidity THERE ARE MANY BENEFITS TO TRADING CANADA! • Offers US algorithmic traders fully electronic liquidity and gateway access to a fair, familiar, and transparent marketplace • Returns benefit doubly from exposure to Canadian Dollar as well as Canadian stocks Returns By Index *(excludes 30% large block in both markets)

  5. Motivate American Trading in Canada • Liquidity, liquidity, liquidity! • Many Canadian-based interlisteds feature superior spreads and volume on TSX • With about 200 interlisted names that trade on NYSE or NASDAQ, is Canada really a “foreign” market? • A significant share of buy/sell orders for CBIs obtain a better priced fill on TSX when US/CDN exchange rates are taken into account 49.2% of trading in CBI symbols occurred on TSX in 2005, (56.3% excluding RIM) - a 4.8% growth in CBI market share over F04

  6. Motivate American Trading in Canada CDS and DTCC work together: • CBIs are fully fungible when bought/sold on US markets • Can buy in Canada and sell in USA or vice versa An exchange with Blue Chip listings: • >50% of global mining/metals • Canada emerging as leading market for energy • Biotech: 2nd largest in world • Technology and other global leaders • SMEs

  7. Motivate American Trading in Canada Supporting Marketing Materials • List of the ~200 Canadian-based interlisted symbols • Breakdown of TSX/S&P 60 • Analysis of FX conversion between US/CDN interlisted • Study of large blocks and avg. trade size • Opportunity for algorithmic trading • Basic market statistics: • Volume of shares traded, number of transactions, and number of listed symbols • Awareness of TSX Venture Exchange and Toronto Stock Exchange • Reference key non-interlisted symbols and active TSX Venture symbols • The Secret Sauce: Value add from each PO, identifying benefits to US dealers

  8. DMA: Connecting to TSX – Technical and Regulatory Every Northbound DMA order is sponsored by a Canadian Introducing Broker, regardless of its routing path. How to Connect “Tomorrow”: • 36 hour turn around for most new DMA clients • No contractual relationship between DMA clients and TSX is required Introduction to Access Vendors Connectivity: • Land lines • TELCO Virtual Clouds Introducing Brokers: • Canadian or US Broker PO members of TSX Correspondent Broker – Customer of the Introducing Broker • 2-501 – Trading through existing PO in Canada using electronic facility • US Institutional NASD registered or Recognized US Financial Association typically accepted for S-DMA

  9. Removing Barriers to Northbound Flow TSX strategy has focused on promoting Northbound flow through Canadian brokers: • FIX global standard messaging protocol • Most S-DMA flow in FIX format • All new access enquiries revolve around FIX • Volume-based fees • TSX top tier less expensive than highest NASDAQ/NYSE discount tiers • Permits rebate for liquidity-providing flow • Elimination of gateway access fees

  10. SOUTHBOUND What is Free Trade ?Access to Both Countries Desire to Attract New US Listings to TSX • SOX (Sarbanes Oxley): “Canada Wants You” American Listings • Cost competitive with strong sector markets, attractive to potential listing firms SEC and US State Commissions Restrict Trading and Listings Outside the US: • SEC restricts the private investor from buying Canadian Stocks (must be SOX approved for US investor to Trade Canada listed stock) • Only 13 US State Commissions have approved the New Uniform Securities Act (USA) exemption permitting secondary [retail] trading of TSX-listed symbols • Blue Sky, (Association affiliated with S&P) registers Canadian listed companies to allow participation in US retail trading. Canadian Capital, and Private investors can trade Southbound without restrictions. Canada continues to reduce barriers: Foreign Property Rule NORTHBOUND SEC Restricts Northbound Trading TSX CAN BE THE AIM OF NORTH AMERICAN CAPITAL MARKETS

  11. Northbound DMA Flow: Benefits to POs S-DMA opportunity not currently being fully exploited. Provides significant opportunity for Canadian dealers: • Operating Leverage: Increased revenue from existing fixed cost base • Growth Opportunity: DMA trading business spans USA and the globe; tremendous interest in Europe • Greater liquidity for Canadian Capital Market • Opportunity to develop reciprocal relationships


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