Most investors prefer using ETFs that are bought and sold frequently. Although thinly traded ETFs are not always less liquid, experienced investors will tell you that they do tend to have wider bid-ask spreads. A healthy trading volume also suggests there’s a lot of interest in the ETF, which makes it less likely to be shut down.

You can get an idea of an ETF’s trading volume by looking at a quote from your discount brokerage or from free online services such as Google Finance. But you’re probably not getting the whole story: you may be surprised to learn that your ETFs are trading more often than you’ve been led to believe.

Here’s why: when you get a quote from these sources, chances are the data is coming only from the Toronto Stock Exchange. But although the TSX gets all the attention, it’s not the only ETF marketplace in Canada: there are several so-called alternative trading systems (ATS) that match buyers and sellers behind the scenes. These include Alpha, Chi-X, Omega, and many others—even some that aren’t named for a letter in the Greek alphabet. It turns out these alternative exchanges handle a lot of ETF trading volume, yet this activity isn’t showing up in your online quotes.

Pump up the volume

Let’s have a look at an example. Here’s a quote for the BMO S&P/TSX Capped Composite Index ETF (ZCN) obtained from Scotia iTRADE after the markets closed on September 9. It indicates that the ETF traded 16,767 shares that day:

iTrade_ZCNOver at Google Finance, you would have found the same number:

Google_ZCNHowever, these quotes are incomplete, because they cover only those trades that were filled via the TSX. You can get the full story if you have access to more detailed quotes with data from all the exchanges.

One useful source is QuoteMedia, a financial data provider that provides comprehensive quotes on its website for free. When you visit the site, type ZCN in the quote box at the top right corner. A pull-down menu will appear with the ticker symbol followed by several suffixes, each representing a different exchange. The one labelled :CA covers only the TSX, and it will give you the same numbers as your discount brokerage or Google Finance. However, if you choose the one with the suffix :CC you’ll be able to look at the combined data from all of the exchanges in the Canadian market.

QuoteMedia_ZCNClick the GO button and you’ll get a detailed quote for the ETF, including its daily trading volume across all of the exchanges. On this particular day this turned out to be 51,830 shares—more than three times what was reported by the more popular quote services:


Trading places

You can confirm this by clicking on Trades in the menu bar and getting the details of the individual transactions, including the number of shares traded and the exchange on which the order was filled:

QuoteMedia_ZCN3This is just one ETF on a single trading day, but this isn’t an unusual situation. Indeed, the insiders I spoke to say that alternative trading systems routinely handle a large percentage—and in many cases, a majority—of ETF trading volume. Large institutional orders may be more likely to get filled via alternative exchanges, while retail investors like you and me are more likely to see our trades go through the TSX.

Why should I care?

You should understand that there’s nothing sneaky going on here. Your request to purchase 200 shares of an ETF may get matched with a seller via the TSX or through an ATS, and you may not know how exactly it got filled. But it doesn’t matter: whenever you place a trade, your brokerage is obligated to have it filled at the best possible price across all the exchanges.

Understanding this idea helps explain the origin of the additional trading fees charged by some discount brokerages. The alternative exchanges charge fees for using their networks. At the bank-owned brokerages this fee is built in to your commission, but at others (such as Questrade and Virtual Brokers) they are passed along to investors who use market orders (or “marketable limit orders”). The good news is that these fees are just a fraction of a cent per share.

If you find all of this a little too technical, here’s a simple takeaway message: if you’re concerned that an ETF isn’t trading very much, you can probably stop worrying. Trading volume isn’t a huge factor in an ETF’s liquidity anyway, and even if it were, the volume is likely a lot higher than your brokerage is telling you.

Special thanks to Kevin Prins of BMO ETFs and Pat Chiefalo of BlackRock (iShares) for their help with the research for this article.