Regulators should force the big brokerage owners of Alpha Trading Systems to reduce their holdings to a minority stake in order to keep stock exchanges fair and competitive, the head of the TMX Group (TSX:X) says.

“The question is, should parties who potentially have a conflict control a marketplace? My view is they shouldn’t,” said chief executive Tom Kloet in an interview on Monday.

“I’m not suggesting anybody’s manipulating anything, but that is the danger I think is out there.”

Alpha Group, which includes Alpha Trading Systems, was established in 2007 by the brokerage arms of Canada’s six big banks as well as Canaccord Capital Inc., the Canada Pension Plan Investment Board and Desjardins Securities Inc.

While Kloet didn’t directly name Alpha, the trading system is considered the TSX’s main competitor.

Kloet made the comments following a speech at the Canadian Club of Toronto where he discussed the competitiveness of the country’s securities exchanges and their presence on the international market.

He said that his concern is not over ownership of the trading systems, but rather the controlling stake held in them. In the case of Alpha, it’s owned by Canada’s biggest brokerages, which are almost all owned by the country’s largest banks.

“For the capital markets to continue to evolve in the best way, absolutely parties with conflicted interests shouldn’t control exchanges,” he said.

Kloet stepped back when asked how exactly the regulators should make changes.

“I believe that the neutral position of a marketplace is valuable,” he said. “I’m not going to tell them (the regulators) how they should get there.”

Bay Street veteran Tom Caldwell said the growth of alternative trading platforms in Canada has developed into a “basic conflict of interest” between the brokerages that run it, and the stocks trading on the market.

“It’s an arcane topic but it’s an area of massive abuse in the capital markets, and it is the next area for scandal,” he said.

Caldwell explained the big trading firms, namely the banks, are controlling the trading environment and also keeping a lot of their orders off the trading exchange which thins out the “price discovery,” or the method used to determine the asking price for a stock, that is supposed to be based on supply and demand.

“What these companies do is they take away trading volumes from the exchange,” said Caldwell.

“Once you thin it out, it’s easy to manipulate. So you’re seeing in many exchanges the “bid” and “ask” (price) being moved around on very small amounts of stock to predicate a bigger trade taking place” behind-the scenes.

Both Alpha Trading Systems and the Canadian National Stock Exchange have launched systems in recent years, and while neither system has had a major impact on the TMX, Alpha is considered a growing competitor.

Meanwhile, international stock markets have ramped up consolidation, with the TSX taking a 19.9 per cent stake in the EDX London, the equity derivatives business of the London Stock Exchange Group, for $7.7 million in May.

Kloet also encouraged regulators to lift transborder stock trading limits with other countries. He said it doesn’t make sense that Americans can’t directly buy shares on Canadian stock exchanges, arguing it’s only fragmenting the market.

Most U.S. brokers don’t have access to the detailed TSX quotes, partly because of SEC regulations, which makes it difficult to encourage trading of Canadian companies, Caldwell explained.

“It means we have less buying of Canadian companies in the Untied States, unless they’re listed on the New York Stock Exchange, or an American exchange as well,” he said.

“It’s a clear example of American protectionism.”

Kloet suggested it could hurt the future development of the Canadian markets.

“The critical requirement for success is having a truly global perspective,” he said in the speech.

“Part of that means removing impediments to transborder trading. First, between Canada and the United States — ultimately, across other jurisdictions. We stand prepared to offer our assistance to government and other bodies in this effort.”

He also told the audience that businesses need to do a better job to be ambassadors, and promote the country, and that the G8, G20 and Olympics are all events that will put Canadian businesses in front of a receptive audience.

“If we learned nothing else from the recent financial crisis, it is that public exchanges, with transparent rules, an investor protection role and absolute neutrality, provide a superior model,” he said.

@page_break@TMX Group employs 845 people across its organization, and operates the Toronto Stock Exchange as well as several other markets including the TSX Venture Exchange, Montreal Exchange, Natural Gas Exchange and Boston Options Exchange.

Shares in TMX Group closed 47 cents higher to $29.98 on the Toronto Stock Exchange.