Latin American Capital Markets

184 RUBEN LEEtended to facilitate a northbound flow of orders from the Amex to the TSE, this wasdelayed because the TSE did not initially have the ability to provide a currency transactionat the same time as a northbound stock trade was executed through the linkage.Each exchange displayed on its trading floor the quotes distributed by the otherexchange in the linkage stocks. Quotes on the Amex were in U.S. dollars, while thosein Toronto were at first in Canadian dollars. Orders were transmitted between thetwo trading floors using the existing automated routing systems of the two exchanges.Initially, only marketable limit orders were sent over the linkage.These wereorders for which the price was equal to, or better than, the quote then being displayedat the receiving exchange. Such orders were treated as immediate or cancelorders, to be promptly executed or canceled depending on whether they were marketablewhen received by the relevant market maker at the receiving exchange.Agency orders were guaranteed an execution up to a minimum amount of shares. Itwas planned to accommodate away from the market orders, namely orders whoseprices were worse than the best available quote at the receiving exchange, at a laterdate.The linkage was initially available only for dual-listed stocks, namely stocks tradedon both the Amex and the TSE. Transactions were cleared and settled through aninterface between the American National Securities Clearing Corporation and theCanadian Depository Service.The Amex/TSE link began operating on September 24, 1985. Six stocks werelisted on the link to begin; this number later increased to 20. It was perceived as obtaininga minimal order flow, most of which was between the specialists on the floorsof the two exchanges. The average ratio of southbound to northbound transactionswas approximately 5:1. A TSE report noted that although such a ratio might be "interpretedas a loss of market share by the TSE to Amex ... any such interpretationshould take into account that some southbound order flow may have been a resultof offsets forTSE trades. As such, a trade on the Amex may not necessarily take awayan opportunity for a trade on the TSE but take place only because a trade was doneon the TSE." The linkage was discontinued at the end of 1988 as being uneconomicalto run.The value of cooperative order-routing systems has been controversial. Onthe one hand, the ITS has been seen by some in the United States as an essential elementof the NMS and as a means of ensuring that competition between markets isenhanced by ensuring that orders are always routed to the trading system that hasthe best quote. On the other hand, it has been viewed both as harmful—in that it encouragesquote matching—and as anticompetitive—in that it preserves a function forstock exchange floor members and does not threaten the central role of specialists,Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub