There’s going to be a new equities exchange in Canada. And high-frequency traders are not welcome to trade on it.
Aequitas, a public exchange focused on the needs of small and mid-cap companies and stocks, is preparing itself for launch in late 2014 or early 2015.
Aequitas was first announced last June and has been gathering interest with both the buyside and sellside since. Aequitas is still subject to the formal approval of the Ontario Securities Commission, Canada’s largest equity market regulator.
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“We are very enthusiastic to begin building our new solutions for Canada’s capital market as we believe they will be true game changers,” said Jos Schmitt, chief executive, Aequitas, in a release.
The new venue will compete against Canadian market behemoth TMX Group, which operates both a large-cap stock exchange (TMX) and second exchange (TMXVenture) that targets smaller companies. Eighty percent of all Canadian trading volume takes place on TMX Group exchanges, according to industry data.
Aequitas’ stated mission is to curb predatory trading strategies; address capital raising issues; and introduce competitive fees across trading, listings and data. According to the venues’ backers, 90 percent of all orders in Canada stay active for less than one minute, 50 percent of them for less than
one second, and 20 percent for less than 10 milliseconds.
Aequitas worked with both the buy- and sellside to get the exchange through Canada’s regulatory approval process. In August 2103, the OSC published for comments a number of key features of the intended Aequitas exchange offering. Based on the comments received and related dialogue with both industry participants and the OSC, Aequitas amended its initial proposal to address several market structure problems in Canada.
The following amendments were made:
-The mechanism to identify predatory high-frequency trading strategies will be refined to ensure it will not be impacted by the potential abuse or other shortcomings of the Short Marking Exempt (“SME”) regulatory marker
-The mechanism to prevent predatory high-frequency trading strategies from taking liquidity in the Hybrid book will be replaced by a mechanism that will, rather than restrict access, make these strategies uneconomic through a combination of trading fees and speed-bumps
-Execution priority of designated market makers, designed to reward their commitment to provide reliable liquidity, will be capped to avoid the potential risk of ‘crowding out the quote’
-Clients of Aequitas members with Direct Electronic Access will not be allowed to act as designated market makers.
The amendments were made in response to the argument that Aequitas would purposely be excluding a portion of the trading public, which did not sit well with regulators or some market participants. Canadian trading professionals markets are very concerned with maintaining an open and lit marketplace. The original Aequitas proposal was deemed too exclusionary by regulators when submitted back in August 2013.
Canada’s Aequitas is very similar to IEX here in the U.S. Both are geared are crossing trades between natural contra-parties and are supported by the buyside.
IEX is owned by the several U.S. buyside firms. Aequitas was founded by both the Canadian buy- and sellside; Barclays Corporation, BCE, CI Investments, IGM Financial, ITG Canada, OMERSCapital Markets, PSP Public Markets and RBC Dominion Securities Inc. No owner shall have more than a 15 percent stake in the new venue and new stakeholders might be added in the future.
The push behind both these new trading venues, both in the U.S. and Canada is rooted in the notion that the prevalence of high-frequency trading hurts the market. HFTs are often cited as front-running larger institutional block orders with their own smaller orders and hurt the buysides’ ability to execute larger block trades at the best prices. This is a newer and greater problem in Canada due to the marketplace’s smaller size and maturity than in the U.S.
Also, Canadian buysiders are concerned that many sellside firms route executions that favor their own financial interests. Like in the U.S., institutions openly lament the “maker-taker” pricing schema favors those exchanges and venues who pay the largest rebates and drives the brokers to execute at them.
According to data from the 2013 Canadian Financial Authority Investor Trust Survey, 52 percent of investors trust the financial services industry to do what is right. In North America, that number falls to 45 percent. Also, only 19 percent of investors strongly agree they have a fair opportunity to profit by investing in the Canadian capital markets.
Aequitas hopes to influence and change these market structure characteristics once in operation. While it is still in the planning stage, some Canadian venues are already taking notice of its intent, said Doug Clark, managing director of research at ITG in Canada.
“Since Aequitas was announced, the TMX has constructed a buyside advisory panel to consult on any market structure or pricing changes,” Clark said. “We suspect that a sellside panel is not far behind. While we are not aware of any plans for other lit markets to follow suit, they will undoubtedly feel pressure from the buy- and sellside to increase transparency around, and input into, any major changes.”
Clark added that while the jury is still out on how successful these various markets such as Aequitas or its European counterpart Aquis, he believes their mere existence will significantly impact legacy exchange behavior in 2014.
