By Boyd Erman
Goldman Sachs Group Inc. (NYSE:GS) is creating yet another stock market in Canada, adding to the competition for TMX Group Inc.'s (TMXGF.PK) exchanges. Goldman said Thursday that it will bring its SIGMA X system to Canada. The SIGMA X market in Canada will be a so-called "dark pool" that will let buyers and sellers anonymously trade stocks that are listed on the Toronto Stock Exchange.
The launch of SIGMA X comes at a time when competition in the Canadian stock trading business is under scrutiny. TMX Group is in talks with a group of Canadian banks, investors and brokerages -- known as Maple -- that wants to buy TMX and combine it with the Alpha alternative trading system. If successful, that would create a company with close to 90 percent market share in Canadian stock trading. The launch of SIGMA X will bring to 11 the number of regulated stock markets in Canada.
Maple has argued that there would still be a lot of competition in Canadian stock trading, in part because it's easy to start new systems such as SIGMA X. Even so, dark pools have not historically taken a big chunk of market share in Canada.
Dark pools have also been the subject of some controversy because some traders and investors believe they sap information from the market. In a dark pool, a buyer or seller has to enter minimal information on the size of the trade she wants to make and the price, and the computerized trading system finds a match. The advantage for the traders is that they don't have to give away crucial clues about their strategies, which could move markets.
The counter-argument is that a fundamental job of a market is to foster what traders call "price discovery" -- giving the world a good sense of what a stock costs at any one point in time. Critics say that dark pools, by hiding price information, detract from the quality of the market at large.
Canadian regulators are currently grappling with the best way to manage dark pools, and are in the process of writing new guidelines that try to balance the advantages and disadvantages. (For those interested in further reading, this is the latest from Canadian regulators on the dark pool situation.)