Nearly a year ago, a new upstart stock exchange launched in Toronto with an ambitious goal: to create a stock market where ordinary investors wouldn't fall prey to predatory trading strategies.
Statistics released by the Aequitas NEO Exchange, which provide a glimpse into trading activities on the new stock market, suggest the plan is working, according to president and CEO Jos Schmitt.
"On our market, over 50% of all the trades are taking place between regular or natural investors — so a retail investor or an institutional investor trading with another retail investor or institutional investor," says Schmitt.
"That is an incredible achievement. ... It means that you are avoiding unnecessary intermediation, and unnecessary intermediation is typically the source of predatory trading."
Predatory trading strategies are employed by some high-frequency traders, or HFTs, to make a virtually risk-free profit at the expense of investors.
In one such strategy, referred to as front running, an HFT that has discovered an investor's intent to buy a particular stock will race ahead and purchase all of the outstanding shares of that stock on all of the various exchanges.
The HFT will then sell the shares to the investor at a slightly higher price and pocket the difference.
The Aequitas NEO Exchange, which celebrates the one-year anniversary of its launch on Sunday, has a "speed bump" in place to prevent high frequency traders from using such strategies.
So far, the exchange has captured 4% to 6% of trade volume in Canada, says Schmitt. It aims to have 20% market share by mid-2019.
In addition to trading securities that are listed on the TSX and the TSX Venture Exchange, Aequitas has also launched a listing service that allows companies looking to issue stock to list on the NEO Exchange rather than the TSX.
Growing that side of its business has been a challenge, says Schmitt.
"What we saw is a lot of interest," says Schmitt. "People loved our value proposition, but everyone was looking at it like, ‘We would love to be on your exchange but we would like to be the second one, not the first one. We want to make sure that it all works and that there's not going to be any issues."'
In January, the NEO exchange announced it had snagged its first application for a listing — the PowerShares DWA Global Momentum Index ETF, which is expected to start trading later this month.
While it continues to focus on growing its trading and listing businesses, Aequitas is also tackling another goal — to provide real-time market data at a competitive price.
Aequitas contends that market data is overpriced in Canada, particularly given the size of the Canadian marketplace relative to that of our U.S. neighbours.
In the U.S., investment advisors pay US$72 monthly for real-time data of all trading that occurs on any public exchange in the country.
In Canada, it costs investment advisors C$30 for TSX data and another C$25 for TSXV data, bringing the total to C$55 a month.
However, those two markets represented on average 62% of Canadian trading volume last year, according to statistics from the Investment Industry Regulatory Organization of Canada.
Aequitas says it's important to take into account the fact that Canada's market capitalization is US$2 trillion, compared to US$28 trillion south of the border.
That means Canadian investment advisors are paying C$55 a month for a snapshot that comprises only a portion of the trading taking place in a much smaller marketplace, according to the upstart.
"If you want to have a view of the trading and activity that's taking place in a security, it is extremely difficult and extremely costly," says Schmitt.
"I think personally that the securities regulators have a role to play over here."
In a filing submitted to the Competition Bureau last year, Aequitas alleges that TMX Group (TSX:X), which operates the Toronto Stock Exchange, has used its dominant market position to artificially push up the cost of market data — a claim that TMX Group calls "inaccurate and misleading."
Eric Sinclair, the president of TMX Datalinx, says market data fees in Canada are priced competitively relative to global peers, adding that it's deceptive to factor in the relative sizes of the Canadian and U.S. marketplaces.
"Our fees are actually less than the U.S., so the way to make us appear more expensive is to either divide the U.S. fees by the market cap of their companies, or multiply ours," Sinclair says.
"That's a very deceptive way of making us appear out of step with everybody else."
The Investment Industry Association of Canada says it has been advocating for regulatory change on the issue of market data for several years, to no avail.
In a statement posted on a website run by Aequitas, the association's president and CEO called the cost of market data "considerable."
"Given the lack of regulatory response to this significant and pressing issue for Canadian dealers, the IIAC is supportive of industry efforts to develop a solution to this long standing problem," Ian Russell said.
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