Canadian “HFT-free” exchange prepares for 2015 launch

Schmitt: Aequitas will “restore focus on the original purpose of an exchange”

A new Canadian stock exchange aimed at retail and long-term investors  is planning  its debut next year,  offering a service designed to curb high-frequency trading and support capital raising.

Aequitas Exchange plans to roll out in the first half of 2015. Led by Jos Schmitt, formerly of  Alpha Exchange,   it is backed by several banks, brokers and asset management firms, including Barclays, BCE, CI Investments, IGM Financial, ITG Canada, OMERS Capital Markets, PSP Public Markets and RBC Dominion Securities. Aequitas is essentially a platform targeted at retail and long-term investors, which it says have been neglected in recent years.

Aequitas has just completed a round of consultations with regulator the Ontario Securities Commission, in which it made some changes to its plans. Notably, high-frequency traders will be deterred from entering the market by a combination of trading fees and “speed bumps” designed to make their strategies uneconomic. The mechanism for identifying predatory HFTs has also been refined to catch more types of abuse, while market making will be placed under firm limits.

“We appreciate the tremendous engagement we have received to-date by a wide variety of market participants and we heard their ask for meaningful competition and enhanced fairness loud and clear,” said Jos Schmitt, chief executive at Aequitas. “During this next phase we encourage everyone to continue to make their voice heard and influence the future of Canada’s equity markets. Our mandate will always ensure the needs of the investors and issuers are put first as we remain steadfast in our commitment to restore focus on the original purpose of an exchange – creating a fair market for all, enabling stronger companies, both small and big, and facilitating the growth of the Canadian economy.”

Schmitt is a well-known figure in Canada as a result of his role at former Canadian ATS Alpha Group, which he founded in November 2008. During the next few years, he became a vocal critic of the maker-taker pricing model used by exchanges to attract high-frequency traders at the expense of other market segments, and the perceived higher costs of rival the Toronto Stock Exchange. These efforts earned him a reputation as a “competition warrior” among his industry colleagues.

However, following the acquisition of both TMX and Alpha Group by the Maple Group, Schmitt left the company in October 2012. Since then, TMX announced that Alpha would be moved onto the TMX Quantum technology platform and serviced by TMX data centres, while its plans for a listings business were quietly shelved. The deal effectively left Chi-X Canada as the only independent trading platform in the country, while market participants fretted about the possibility of monopolistic behaviour by the new group, which also acquired Canada’s equities clearing house CDS.

Aequitas expects to file its final application as an exchange in the first half of this year, after which there will be a further round of comments before the exchange can launch.