Bay Street firms pitch TSX rival exchange
Canada's biggest bank is joining with other major financial players to create a new stock exchange that the creators say will keep costs low and discourage computerized high-frequency trading, which some say is sapping confidence in market fairness.
Royal Bank, mutual fund conglomerates IGM and CI Financial, pension fund PSP Investments and international banks ITG and Barclays are combining to create a new stock exchange they're calling Aequitas.
The name is the Latin word for fairness, and the financial titans founding the exchange say that idea will be a cornerstone of the new exchange.
"Through Aequitas, we have a compelling opportunity to create a level playing field for both retail and institutional investors by challenging certain predatory high frequency trading strategies which have impacted the quality of existing equity markets," said the company's new chair Greg Mills, who is also RBC's co-head of global equities.
High-frequency trading is the term used to describe the type of computerized trading activity where sophisticated algorithms take advantage of pricing and market inefficiencies, often by trading millions of shares in nanoseconds, and making incremental profits on the transactions.
Lower trading fees
The practice has become increasingly prevalent, but detractors say it encourages speculators and leads to the sort of sudden "flash crashes" where markets begin to inexplicably tank, because the systems aren't intelligent enough to pause for reflection and merely make automated hair-trigger decisions based on microscopic changes in stock prices.
These strategies negatively affect the liquidity of listed securities by discouraging true market-makers, resulting in excessive costs falling squarely on investors, the company said in a release.
"As 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," Scott Penman, IGM's chief investment officer and vice-chair of the new company was quoted as saying.
IGM and CI together own more than $125 billion worth of Canadian equities, heft that will certainly provide the new exchange with enough trading activity in the short term.
Aequitas's founders aim to compete with the TSX and other markets by offering lower trading fees. The founders expect the exchange to be operational by the end of 2014, pending regulatory approval.