The Toronto Stock Exchange (TSX) is again slashing fees and adding electronic trading incentives to spur volume and liquidity of exchange-traded funds and other listed securities.

The changes are aimed at ETF market makers and high-velocity traders, who use electronic trading platforms to buy and sell throughout the day and take advantage of minute-by-minute arbitrage opportunities.

The TSX is the largest equities exchange in Canada, controlling 98% of stock trading, but has said that with the fee reductions it will also attempt to capture more trading from investors and traders located around the globe.

There are 73 ETFs listed in Canada and approximately $16 billion in assets across three managers, according to the third-quarter 2008 industry report from Barclays Global Investors' ETF research implementation strategy team.

Exchanges in the U.S. have been more active in responding to demand for lower trading fees on ETFs as a way to increase their share of the growing market (see story here.)

Analysts that cover the exchange said the fee reductions could have been even greater, and that they were, not coincidentally, introduced at the same time that the company announced a less-than-exciting 5% increase in quarterly profits yesterday. Even that 5% growth came mostly through its acquisition of the derivatives-focused Montreal Exchange.

The Q3 equities and fixed-income trading revenues for TSX were barely up over Q3 2007 levels, and the overall increase in revenue and net income for the TSX came primarily through the derivatives trading from the Montreal Exchange deal. Now, like all derivatives and fixed-income houses, the Montreal Exchange has been hit hard by the credit market meltdown.

The changes, effective January 1, will increase liquidity-providing credits for all market participants, and reduce the spread between the active fee and passive credit for 90% of market participants. Registered market makers, including ETF market makers, should also benefit from a guaranteed zero fee cap per trader and increased liquidity-providing credits.

Furthermore, a revised pricing model for ETFs will be implemented to grow trading. TSX expects to lose $10 million to $14 million, or about 10% of annual trading and clearing revenue, but is betting that increased trading and volumes will offset the losses.

The electronic liquidity program, in particular, offers fee incentives to experienced high-velocity traders using proprietary capital and passive electronic strategies on the TSX Central Limit Order Book. The change is expected to prevent the exchange from losing its position as the central price discovery platform in the Canadian market, as well as lead to tightening spreads, reduced friction costs, and increased overall turnover.