Canada’s Market Data Problem

Canada’s equities markets are just like any other market. They are made up of buyers and sellers that exchange goods – in this case, securities.

Information is what allows buyers and sellers to make decisions in the market. However, if that information is inaccurate or incomplete, it can impact the health of the market.

Information Failure

Today’s infographic from the Aequitas NEO Exchange details the current “information failure” that is happening in the Canadian market.

What’s information failure? It’s when some, or all, of the participants in an economic exchange do not have perfect knowledge. This leads to a misallocation of scarce resources and it appears to exist in numerous market exchanges.

In the case of securities in Canada, the problem arises from the market data that investors are using to make buying and selling decisions.

Canada’s Market Data Landscape

Market data is simply the information that investors see when buying or selling a security – for example, prices (bid, ask) or liquidity indicators (volume, market depth).

Aside from the TSX itself, there are 13 other trading platforms that facilitate the buying and selling of securities in Canada. These range from exchanges (like the CSE or Aequitas NEO Exchange) to more proprietary platforms (Instinet or Liquidnet) which are used primarily by institutions.

Either way, trading is being done across all these platforms each day, and each exchange generates its own market data on prices and liquidity.

The problem?

Many investors only see just part of the whole picture. For example, retail investors that buy through an online brokerage account may only see data from the TSX and TSX-V, which together account for about 59% of volume traded (as of Q4 2016).

The Consequences

By only accessing partial market data, the true liquidity or price of a security may not be accurately represented.

Here’s an example of how this unfolds in real life:

An investment advisor wants to buy a particular ETF for a client.

A partial view of the market might mean that the security looks less liquid than it actually is.

As a result, the advisor may choose to put the client in a different, less optimal fund.

Here’s another example:

An investor is considering several companies in which to invest.

A partial view of market activity can result in companies appearing more, or less, attractive than others.

Uninformed investment decisions lead to less optimal investments and the potential misallocation of capital.

In other words, information failure can affect investors and their portfolios directly – and can result in important consequences.