Canada’s dominant stock exchange operator - the TMX Group - has some new competition with a twist. The Royal Bank of Canada, Barclays and Investment Technology Group (ITG) and others have joined forces to form Aequitas Innovations, a new stock exchange that will limit the role of high frequency trading.
[Hold on to that trade! Have we hit peak HFT already?]
Slated to start trading in 2014, the Aequitas exchange aims to be a refuge for investors who have been short-changed by the high frequency traders, according to managers behind the new venture.
"I would call it a grassroots reaction from some key market stakeholders saying we need choice, more choice in the marketplace," says Jos Schmitt, chief executive officer of Aequitas. According to news reports, Schmitt previously ran Alpha Group before it was taken over by TMX Group, which runs the Toronto Stock Exchange. TMX handles an estimated 80 percent of equity trading in Canada.
"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," says Greg Mills, chairman of Aequitas, and co-head, global equities, RBC Capital Markets.
Canadian mutual fund managers CI Financial Corp and IGM Financial Inc, pension fund PSP Public Markets are also behind the new exchange.
So why eschew HFT now? What is the allure of a go-slow exchange? HFT has been the punching bag for several critics of high-speed trading. While HFT firms and traders claim that they create much needed liquidity, critics charge that their practices create nothing more than market volatility and unneeded fear for ordinary investors. Also, more and more government regulators are looking at HFT and its impact on the market. While the outrage might be as loud as it was in the days after the collapse of Lehman Brothers and Bear Stearns, the steady drumbeat against HFT has not quieted down. Clearly some regulations in the US markets are forthcoming.
[In the age of Dodd-Frank, market surveillance demands 20/20 vision.]
Why Canada? Because of the country’s stellar standing after the credit collapse of 2008 thanks to its tight risk rules, an exchange that bars the door to HFT might win favors with lawmakers and auditors. Canadian firms have a different definition of risk compared to the cowboys in the US so the idea of an easy-trading oasis might be what investors - those who want to trade at normal levels - ordered.
It will be interesting to see how TMX responds. Perhaps they will counter with even faster feeds and trading rates.
After all, human beings love speed.