By Boyd Erman

Globe and Mail Update Last updated on Monday, Jul. 27, 2009 07:01AM EDT

Almost one of every five shares that changes hands on the TSX now comes via the trading floor at CIBC World Markets Inc. (CM-T65.700.871.34%) , which in less than a year has used a focus on electronic trading to climb from a middle-of-the-pack ranking to the dominant player among Bay Street houses.

Statistics posted last week by the TSX show CIBC traded a hair under 19 per cent of all the shares that changed hands in June, well ahead of second-place TD Securities (TD-T62.250.560.91%) and its 13.5-per-cent market share. CIBC and TD also vie for top spot in trading on Alpha, the TSX's largest competitor, making CIBC by far the busiest over all.

A year ago, before new management took over at the securities firm, CIBC was one of the firms fighting it out to get an 8- or 9-per-cent market share in stock trading.

Most of the growth is coming from transactions funnelled through CIBC's trading floor by big computerized trading firms in the United States that use their superfast buying and selling reflexes to lock in tiny profits on thousands of trades a day on the TSX. Increasingly, the stereotypical hard-bitten trader working the phones is becoming a smaller part of the business.

The top ranking will help both CIBC's reputation and its profits, and will likely result in even more business, analysts say.

Those in the industry say CIBC is steadily adding new customers in the ELP (electronic liquidity providers) world.

“In the capital markets business, flow often begets flow” said Macquarie Capital Markets financial services analyst Sumit Malhotra.

The strategy of serving the big speed-focused trading firms is not without controversy, because their trading techniques raise hackles among some in the industry.

There are those who say that the superfast ELP traders are taking advantage of quirks in the market and their speedy computers to profit at the expense of longer-term investors.

High-frequency traders now account for as much of 35 per cent of the trading on Canadian stock markets, and the effect isn't always good, say critics, many of them CIBC's competitors. They argue that the new traders force other market players to spend more on trading fees and new technology, which hurts long-term investors.

“Some of these new entrants are employing predatory strategies that are increasing trading and infrastructure costs for all other market participants, with little or no offsetting benefits,” BMO Nesbitt Burns argued in a recent report on the subject.

The Investment Industry Association of Canada, the trade group for Canadian brokerages, has sought a ban on one of the ELP trading strategies that results in so-called locked markets.

Proponents of the new trading strategies contend that they do help other investors by providing a constant stream of buy-and-sell orders, enabling longer-term investors who want to trade to easily find someone to do business with.

It's no coincidence that ELPs are using CIBC as their broker. CIBC's two top trading executives came from TSX-owner TMX Group Inc. (X-T34.85-0.03-0.09%) last year, not long after putting in place incentive programs at the exchange to draw ELPs to do business there.

Then-TMX chief executive officer Richard Nesbitt moved over first to be head of the bank's securities business, and he brought in Rik Parkhill to run stock trading and other equities businesses at CIBC.

The focus on ELPs started almost immediately, as did the market share gains.

“CIBC continues to significantly expand its institutional equity services and products, with the goal of helping all of its customers adapt to the market-structure changes driven by the explosive growth in automated trading and increased interest in Canada,” Mr. Parkhill said.

CIBC also added new people to its desk to handle big block trades in the more traditional manner.

Electronic trading has a number of advantages for brokerage firms, chiefly that it can enable a firm to do much more business without adding many people, enhancing profitability. There is also little financial risk for the firm, which only collects fees for processing client orders and doesn't have to put any of its own money into the market.

The electronic trading initiative isn't stopping at stocks. Mr. Nesbitt has indicated he wants to bring the same ideas to bonds and foreign exchange.

The trading commissions, while smaller on electronic transactions than on those that involve live traders, are adding up. In the last two quarters, CIBC has earned $54-million trading equities, putting the bank on track for the best year in that business since 2005. That's feeding fatter profits for the whole firm. Macquarie's Mr. Malhotra pointed out that on an adjusted basis, the securities arm of CIBC earned $200-million in the second quarter, which puts it ahead of pace for the $300-million to $500-million in annual profits that Mr. Nesbitt has targeted.

http://www.theglobeandmail.com/globe-investor/cibc-surges-ahead-on-electronic-trading-strategy/article1231784/