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  2. TRADING
June 15, 2015 01:00 AM

Canadian exchange casting itself as fairer alternative to TSX

Rick Baert
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    A new exchange formed by Royal Bank of Canada hopes to lessen the impact of high-frequency trading in Canadian markets while offering an alternative venue to the Toronto Stock Exchange.

    Aequitas Innovations Inc., an equity trading venue that became operational March 27, are targeting TMX Group Inc., operator of the TSX, with investments from large Canadian pension funds and money managers both in Canada and the U.S. The venue, which last month began trading in the approximately 4,000 equities that trade on TSX, intends to make its exchange fairer and more competitive for all participants, said Aequitas President and CEO Jos Schmitt.

    “Our key objective is to curb predatory high-frequency trading in the market,” Mr. Schmitt said. “Other objectives are to reinject real liquidity in the market, providing market makers with benefits for providing that liquidity and to provide a safety net when that liquidity is needed in times of crisis, and offering market data that's accessible at a more reasonable cost” vs. what TSX is charging.

    But it's the focus on averting predatory trading that, Mr. Schmitt and others said, is what provides value for those using Aequitas, which will mean more profit down the road. “We are executing our business model to make trading better,” Mr. Schmitt said. That will lead to long-term profitability, which we will then reinvest into future innovations.”

    The effort has some big backers. Among them are U.S.-based money manager Invesco Ltd., Atlanta, and Canadian pension fund managers British Columbia Investment Management Corp., Victoria, which manages C$114 billion ($91.5 billion) in provincial pension and other assets; C$72 billion Ontario Municipal Employees' Retirement System, Toronto; and Montreal-based PSP Investments, which manages a combined C$93.7 billion for the Canadian Public Service, Canadian Forces, Royal Canadian Mounted Police and Reserve Force pension plans.

    “You can see why pension funds and money managers are interested in what we're doing,” Mr. Schmitt said. “High-frequency traders have an impact on what they're doing, and they're looking for a venue that can provide critical liquidity.” That liquidity is crucial for institutional investment in Canadian equities, he said; because liquidity there is concentrated in a small number of securities — about 250 of the 4,000 total — the ability to invest in a broad spectrum of Canadian equities is restricted, leading Canadian equity managers to broaden their investment strategy to U.S., international and emerging markets equity. “That's not good for Canadian investing,” he said.

    Unlike other venues, such as Luminex Trading & Analytics LLC in the U.S. and Plato Partnership Ltd. in Europe, which focus on block trades for institutional investors, Aequitas targets both institutional and retail investors. But its focus on halting predatory trading is particularly in tune with what large, long-term investors are seeking, Mr. Schmitt said.

    Speed bumps

    To deter front-running and other predatory trading strategies, Aequitas employs “speed bumps” — delays of from three to nine milliseconds on trades that apply to all market participants, Mr. Schmitt said, adding TSX has exceptions that allow some participants to avoid similar delays.

    Deana Djurdjevic, senior vice president, equities trading, TSX Markets, Toronto, said making outright bans on strategies is not the answer to front-running. “As are markets worldwide, we're looking closely at ways to contain issues that have created concerns in all equity markets around the world — not with bans on behavior, because history has proven that those are detrimental to the market, but on ways to contain certain issues spurred by electronic markets and high-frequency trading,” she said.

    Kevin Cronin, global head of trading for Invesco, Atlanta, said Invesco is “a philosophical investor” in Aequitas and is not involved in its operation. “Making money is not our primary motivation for investing in Aequitas,” Mr. Cronin said. “If this investment helps investors to trade more responsibly, then the investment is beneficial to us. ... I assume it's the same for asset owners. It's really a fiduciary responsibility” to get best price on trades. (Invesco both invests in Luminex and will help to operate it along with seven other U.S. money managers.)

    Officials at BCIMC, Ontario Municipal and PSP would not comment on investments in Aequitas.

    Added competition in Canada is welcome, said Jason Valdez, managing director and global head of equity trading, Penserra Securities LLC, Orinda, Calif. However, he's heard from Canadian brokers that the speed bumps are too complicated. Penserra has no investment in Aequitas, but its clients trade on both the new venue and TSX.

    Mr. Cronin said such criticisms come down to a preference for traders between speed and price. “If you like the first, you won't like this. But for long-term investors, they're more concerned with getting the right price. That's what matters.”

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