01.17.2014
By Terry Flanagan

Aequitas Forges Ahead

Aequitas Innovations is moving forward with plans to build a new Canadian stock exchange and private securities platform.

Industry and regulator feedback on Aequitas’ business model have led it to adopt a series of amendments that collectively will allow it to deliver on its mandate to enhance market fairness by curbing high-frequency trading.

Aequitas plans to file an exchange application with the Ontario Securities Commission in the first quarter of 2014, and to launch its services over the first half of 2015. The exchange application will be based on the original business plan published in 2013, together with the amendments that resulted from the comment process initiated by the OSC, as well as the company’s own dialogue with regulators.

“From our perspective, it was very clear that if we could not come with a solution and adjustments that would address regulatory concerns while at the same time keep 100% intact the mandate and the vision that we set up when we launched Aequitas, we would not have continued this initiative,” said Jos Schmitt, CEO of Aequitas Innovations. “We were surprised with the amount of feedback and dialogue that we had with industry stakeholders and regulators. It was extremely constructive.”

Jos Schmitt, Aequitas

Jos Schmitt, Aequitas

The compensation that Aequitas proposes for market makers is matching priorities for its assigned securities in Aequitas’ dark and hybrid books, where they will not be exposed to predatory flows.

“When you look at our ownership structure, those buy side firms are there because of our vision,” said Schmitt. “I am not interested in launching another marketplace that caters to HFTs. We want to create a marketplace that will cater to all market participants.”

Founding shareholders of Aequitas—Barclays, BCE, CI Investments, IGM Financial, ITG Canada, OMERSCapital Markets, PSP Public Markets, RBC Dominion Securities—have approved the Aequitas business plans and the decision to proceed with the amended filing.

“As current marketplaces cater to volume, they can damage the quality of execution for those who actually want to hold something at the end of the day,” said Scott Penman, vice chair of Aequitas and chief investment officer at Investors Group, a wholly-owned division of IGM Financial Ltd.
“A new and different exchange that serves long term investors, one that strikes the right balance between liquidity, price discovery and cost efficiency, is very exciting for us. There are mechanisms that Aequitas will bring that will help address some inefficiencies and some of the ‘unlevel’ advantages that certain market traders have.”

In addition to a lit and dark order book, Aequitas plans to offer a hybrid trading book that displays aggregate liquidity by price level at or within the NBBO, but with not individual resting order information disclosed.

In the original proposal, only retail and institutional investors would be permitted to remove liquidity from the hybrid trading book, but Aequitas has amended this to allow high-frequency traders to access liquidity as well, with appropriate restrictions.

The mechanism to prevent predatory high-frequency trading strategies from taking liquidity in the hybrid book will, rather than restrict access, make these strategies uneconomic through a combination of trading fees and ‘speed bumps.’

“The one amendment that was the most important was the one around how to manage and control high-frequency firms taking liquidity from our hybrid book. This works even better than the original solution, because we will create a real hurdle in the market for HFTs, and they will have to take that into consideration,” said Schmitt. “In the old model, the book was something that HFTs could ignore, and now they can’t ignore it. It creates a hurdle to deploy those strategies.”

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