Royal Bank of Canada Gains by Putting the Brakes on Traders

The spoils on Wall Street generally go to the firm that is the fastest and most opaque. But one upstart contender is trying a distinctly counterintuitive approach.

In the financial equivalent of the Tortoise and the Hare, Royal Bank of Canada has risen up the ranks of the biggest stock trading firms in the United States by embracing a rather Canadian restraint and prudence.

At the center of the efforts by the bank’s New York trading desk is a technology that actually slows its customers’ orders so as to evade high frequency traders. And unlike nearly every other large bank in New York, it has elected not to open its own dark pool, where banks privately carry out customer trades away from the public exchanges. Recently, the firm has also been calling for regulatory changes in Washington.

While the big names like Credit Suisse and Goldman Sachs still trade many more shares of American stocks, the Canadian bank has become particularly popular with the largest, most sophisticated mutual funds and investors, according to a recent survey by the Tabb Group. Over all, it has risen to become the ninth largest broker for American stocks last year, up from the 18th largest in 2010, according to the brokerage and research firm Abel/Noser.

Its effort to shake up American stock trading is, to some degree, an outgrowth of a broader Canadian skepticism about the turbocharged American trading business. On Tuesday, the bank’s executives in Canada announced that it and several other investment firms would create a new exchange in Canada with the aim of having a trading platform that would be less hospitable to high-speed traders than the Toronto Stock Exchange.

Critics of modern markets say that recent innovations in trading have ended up creating conflicts of interests between banks with extensive trading operations and the customers who send them trades to execute. In some cases, the banks have an incentive to trade in exchanges that reward them with rebates, or in their own dark pool, rather than where they can get the best price for their customers.

Royal Bank of Canada says that its trading programs ignore the fees and rebates, and its customers say they notice the difference.

“They really go out of their way to try to find ways to support our business — sometimes actually to their own detriment,” said Robert McGrath, the head of trading at Schroders, which manages $360 billion and uses R.B.C. “That’s pretty unique in the industry.”

Some competitors say that the approach is more a marketing pitch than anything else. And given the complexity of the markets, it can be hard to get reliable statistics on whether the bank’s results are actually better for the client.

But Mr. McGrath said that according to his firm’s analysis Royal Bank of Canada spends more than other brokers to get his orders done, and gets better results.

There are downsides. The strategy makes the bank less money on each trade than other firms receive, but it aims to make up for that by winning client loyalty.

“Our philosophy is, and we sit around here all the time saying it: Doing the right thing is not always the most profitable thing,” said Robert Grubert, the head of trading at R.B.C. “As business people that’s not great, but it’s an investment in our client and the long term.”

Canadian banks have generally been viewed more positively in recent years after they largely stayed away from the risky subprime mortgage market and sailed through the financial crisis. Canada’s six large banks were all recently ranked by Global Finance magazine as safer than any large American bank.

When it comes to stock trading, Canadian banks and regulators have taken a conspicuously cautious approach compared with their American counterparts. Canadian regulators last year put rules in place to limit both dark pools and high-frequency trading firms, which hit exchanges with tens of thousands of orders each second in order to take advantage of small discrepancies in stock prices.

Canadian banks, unlike American banks, have mostly hesitated to build their own high-speed trading desks. Although such trading accounts for about 42 percent of all stock trading in Canada, much of that is done by American firms.

In the United States, Royal Bank of Canada’s stock trading staff of about 130 sits together on a trading floor in the World Financial Center in Lower Manhattan. Its conference room is filled with pictures of soothing icebergs and idyllic Canadian prairies. There is a small team of employees whose only job is to study the structure of the complex stock markets and help explain it to clients.

The bank began its push to enter the big leagues of stock trading in America in 2009, just as the market’s computerized aspects went into overdrive. Before that, it was rarely a popular broker for investors looking to trade American stocks.

The man leading the effort, Brad Katsuyama, was educated in Waterloo, Ontario, and moved to New York after only a few years on R.B.C.’s trading desk in Toronto.

The operation that Mr. Katsuyama built certainly does not shun technology. In fact, it is made up largely of computer programmers who were hired from banks and high-speed trading firms. What the group aimed to do was look for ways in which the new market structure was putting investors at a disadvantage.

One of the first things that Mr. Katsuyama’s team noticed, members said, was that his traders were having trouble getting their trades done at exchanges that were geographically closer. They discovered that in the time that it took for a trade from R.B.C. to travel through fiber optic cables from a slightly closer exchange to a slightly farther exchange, a high-speed trading firm could spot the trade, cancel its order on one exchange and raise the price on another to take advantage of the R.B.C. client.

The discovery led to the invention of the bank’s trading program, named Thor, which was approved last month for a patent. The program factors in the distance between exchanges and slows signals to the closer location so that the orders reach all of the exchanges at exactly the same moment.

Dan Royal, the head of trading at the asset manager Janus Capital, said that he noticed that after Royal Bank of Canada started using Thor, he was able to buy more stocks at the price he initially saw, rather than being forced to offer more for the same stock.

Royal Bank of Canada is generally among the best brokers in getting clients better prices, and has been improving each year, according to data from Abel/Noser.

On top of its technological innovations, the bank has recently become more of a public presence in the public debates about what the markets should look like, often standing as the lone bank in favor of a major market overhaul.

R.B.C. executives recently asked American regulators to introduce a program that would ban exchanges from paying rebates to banks that send in customer orders. Most brokers like the rebates, and exchanges argue that the payments are necessary to stop all the trades from going into dark pools. But the bank and other financial experts have said that the rebates encourage brokers to go where they get the biggest payment, not where they get the best price for their customers.

Richard Steiner, who leads these market structure efforts at Royal Bank of Canada, said, “You get to a point in the marketplace where unfortunately you need regulatory action to level the playing field.”

In the meantime, even admirers of the bank say that there is a limit to how many orders they will send to it. The bigger banks still see more orders — in part because of the dark pools they operate — and that makes them essential for investors who want to get their trades done immediately, even if it costs a bit more.

Mr. Katsuyama left Royal Bank of Canada’s offices last year to start an exchange that caters to longer-term investors like mutual funds. Few of the remaining people on the 36-person electronic trading team are from Canada. But Mr. Grubert said a certain Canadian sobriety still pervades the company. When the news of Thor’s patent approval came through, there were just a few high fives.

“We don’t get crazy,” Mr. Grubert said. “That’s part of the culture.”