New Canadian stock exchange seeks to challenge dominant TMX

Tue Jun 25, 2013 2:27pm EDT
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By Alastair Sharp and Euan Rocha

TORONTO (Reuters) - Canada's largest bank and some of its most influential fund managers plan to set up a new stock exchange to challenge the dominant TMX Group Ltd (X.TO: Quote), one that would limit the role of controversial high-frequency trading strategies.

The new exchange operator, Aequitas Innovations Inc, will be backed by Royal Bank of Canada (RY.TO: Quote) and other institutions not involved in the 2012 takeover of TMX, which operates the Toronto Stock Exchange.

Its founders said on Tuesday that the new exchange, expected to launch in late 2014, will cater to retail and institutional investors who they believe have been short-changed by predatory high-frequency trading practices.

Once launched, Aequitas would be a direct competitor to the TMX Group, which also operates Canada's main small-cap and derivatives exchanges. TMX handles roughly 80 percent of equity trading by value in Canada. The exchange operator said high- frequency trading makes up around 15 percent of its volume.

High-frequency traders use sophisticated algorithms to trade thousands of shares in a millisecond with the aim of earning a profit from market making and price imbalances. But many players, including some large fund managers, have criticized their impact on markets.

"I would call it a grassroots reaction from some key market stakeholders saying we need choice, more choice in the marketplace," said Jos Schmitt, chief executive officer of Aequitas, who headed TMX rival Alpha Group before it was taken over by the larger exchange operator.

Schmitt said the long-term goal is for the new exchange to grab 20 percent of the Canadian equity trading market.

Aequitas also plans to launch a secondary market for shares of private companies, which it said will increase funding opportunities for start-ups and give early investors in these companies an exit option.   Continued...