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Montréal Exchange Introduces New Auction Functionality For Canadian Options Trade

May 1, 2024

This independent content is made possible by TMX

By Etienne Ménard,
head of product, equity derivatives

Over the last few years, the Montréal Exchange team has worked with market participants to understand future trends and with Canadian regulators on product innovation. We have made strategic investments to facilitate more sustained liquidity in the Canadian-listed derivatives market, including developing new trading functionalities, extending trading hours for a global investor base, launching new investment vehicles and modernizing derivatives products. As a result of these efforts, there has been an upward trend in trading volumes on MX, particularly options, which witnessed an 11.9% increase in 20231.

This year, MX will introduce guaranteed cross auction functionality, part of a broader series of enhancements to make Canadian-listed derivatives more appealing to domestic and international investors. The auction mechanism will differ from the current option-crossing procedure as it allows market participants to compete to improve the execution price of a liquidity seeker. If participants choose this route, this unique feature includes an option for zero-second crosses on more significant transactions.

The new functionality is expected to improve market quality and liquidity by enabling price improvement and increasing interactions among participants. Additionally, the exchange is automating contingent options trades to ensure they are executed electronically and can be used with the new auction mechanism. The dual nature of this functionality reflects MX’s deep understanding of market dynamics, where the need for speed and optimal price discovery are carefully balanced.

The launch of guaranteed cross auction marks a new era for Canadian market participants, offering enhanced trade execution prices and better clearing counterparty risk management. This strategic move has resulted in a more inclusive and competitive trading environment where institutional investors expose a portion of their pre-arranged transactions through an auction, and market makers gain access to a higher volume of transactions. By implementing guaranteed cross auction functionality, MX will improve overall market quality through tighter bid-ask spreads.

In tandem with guaranteed cross auction, MX will introduce ‘covered with stocks’ functionalities to simplify complex trading strategies, minimize execution risks and enhance the trading experience. The exchange will ensure that trades are executed at more favorable prices by fostering a trading environment where different market participants can engage more efficiently. These efforts are integral to our mission to modernize our offerings, benefiting all participants.

Market makers benefit from the increased volume of transactions, which allows them to offer tighter spreads and manage risk more effectively. Institutional investors can initiate auctions at sub-penny levels for trades of any size, resulting in cleaner, more efficient execution and potential cost savings through consolidated trades. Retail investors, on the other hand, can expect to benefit from reduced execution costs and tighter bid/ask spreads, which makes trading Canadian-listed derivatives more accessible and appealing.

These collective innovations, supported by our ongoing focus on process improvements, indicate the exchange’s unwavering dedication to creating a unified trading ecosystem that caters to market makers’ and retail and institutional investors’ needs. As MX continues to innovate and refine its market structures, it solidifies its position as a leader in the financial markets, capable of adapting to and meeting the complex needs of global market participants. This, in turn, contributes to the vibrancy and competitiveness of the Canadian financial markets, setting a benchmark for exchanges worldwide.

Our strategic investments in trading functionalities and automation represent a significant leap forward in the evolution of Canadian-listed derivatives trading. By prioritizing the needs of all market participants and embracing technological advancements, we are not just reacting to the changing financial landscape but actively shaping its future. This commitment to innovation and excellence ensures that MX remains at the forefront of the financial industry, offering a dynamic and efficient trading environment.

1Montréal Exchange Statistics December 2023

 

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