Royal Bank, others plan new Canadian stock exchange

New exchange is expected to launch in late 2013, and will cater to retail and institutional investors

PUBLISHED : Wednesday, 26 June, 2013, 12:04pm
UPDATED : Wednesday, 26 June, 2013, 12:04pm

Canada’s largest bank and some of its most influential fund managers plan to set up a new stock exchange to challenge the dominant TMX Group, one that would limit the role of controversial high-frequency trading firms.

The new exchange operator, Aequitas Innovations, will be backed by Royal Bank of Canada and other institutions not involved in the last year takeover of TMX, which operates the Toronto Stock Exchange.

Its founders said the new exchange, expected to launch in late next year, will cater to retail and institutional investors who they believe have been short-changed by predatory high-frequency trading practices.

High-frequency traders use sophisticated algorithms to trade thousands of shares in a millisecond with the aim of earning a profit from market making and price imbalances. But many players, including some large fund managers, have criticised their impact on markets.

“I would call it a grassroots reaction from some key market stakeholders saying we need choice, more choice in the marketplace,” said Jos Schmitt, chief executive officer of Aequitas, who headed TMX rival Alpha Group before it was taken over by the larger exchange operator.

Once launched, Aequitas would be a direct competitor to the TMX Group, which also operates Canada’s main small-cap and derivatives exchanges. TMX handles roughly 80 per cent of equity trading by value in Canada.

TMX is controlled by a consortium of Canadian banks and other financial institutions that thwarted a takeover bid by London Stock Exchange Group. The consortium, known as Maple Group, then combined the Canadian exchange operator with Alpha and a trading clearinghouse.

RBC, the country’s biggest lender, was one of the few Canadian banks not involved in the consortium, as it had advised the London Stock Exchange on its bid.

In addition to RBC, Aequitas is backed by Barclays, Canadian mutual fund managers CI Financial and IGM Financial, pension fund PSP Public Markets, and Investment Technology Group.

“This is the first marketplace in existence that has more investors around the boardroom table than it does brokers,” ITG Canada’s chief executive, Nick Thadaney, said in an interview.