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.
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.
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.
It's also been claimed that high-frequency trading abuses natural market prices, because traders can quickly place "dummy" orders to buy and sell that they have no intention of following through on, just to gauge interest in a stock, and move the price of it in one direction or another in the process.
These strategies negatively affect the liquidity of listed securities by discouraging true market-makers, resulting in excessive costs
It remains to be seen whether Aequitas truly levels the playing field for small investors — much less brings down costs — but the new exchange will make it easier for investors to buy into private share and unlisted companies, two asset classes that are currently out of reach for most retail investors.
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.
Indeed, the presence of major mutual fund firms — who are collectively known as being on the "buy side" of the industry because their core business is buying securities — makes Aequitas different from other TSX alternatives that have come before. Such as Alpha Trading Systems, a rival trading platform that made inroads before being dissolved when Maple Group gained control of the TSX last fall.
Aequitas's founders expect the exchange to be operational by the end of 2014, pending regulatory approval.
