Institutional coalition to build TMX rival exchange and fend off predatory HFT

Source: Aequitas

Aequitas Innovations Inc. ("Aequitas") is today proud to announce its intent to enter the Canadian capital markets by establishing a new stock exchange that will seek to restore the original purpose of an exchange - the efficient allocation of capital between issuers and investors as a central force driving the Canadian economy.

Aequitas was founded by a diversified group of Canadian corporations, representing professional money managers, pension fund managers, institutional and retail brokers, and Canadian issuers.

With a balanced, broad and open ownership structure, the founding investors, Barclays Corporation Limited; CI Investments Inc.; IGM Financial Inc. (Investors Group and Mackenzie Financial); ITG Canada Corp., PSP Public Markets Inc.; and Royal Bank of Canada, are seeking to apply innovation, technology and competition to improve fairness and efficiency in the markets with particular attention to the benefits of traditional investors and issuers - the cornerstones of the Canadian economy.

The Need for Improvement

"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 Greg Mills, Chairman of Aequitas, and Co-Head, Global Equities, RBC Capital Markets. "Marketplaces in Canada and around the globe are increasingly out of sync with their traditional users as they attract and cater to volume and revenue-generating trading over traditional investors and true market makers. Aequitas is designed to promote true and reliable liquidity, and will provide an operating model more aligned with the interests of investors and issuers to support market quality."

Aequitas believes that, while there are acceptable high-frequency trading (HFT) practices that can contribute to market quality across a variety of asset classes, certain predatory HFT strategies, such as latency arbitrage, rebate arbitrage and exploratory trading, impair the quality of execution for retail investors and for institutional investors representing the unit holders of pension plans and mutual funds. Additionally, these strategies negatively impact the liquidity of listed securities by discouraging true market makby discouraging true market makers, and result in excessive costs falling squarely on investors, issuers and the networks that support them.

"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," commented Scott Penman, Vice-Chair of Aequitas and Executive Vice President and Chief Investment Officer for Investors Group, a wholly owned division of IGM Financial Ltd. "With assets of over $125 billion and a traded volume of Canadian equities in excess of $25 billion in 2012, Investors Group and Mackenzie Financial are significant long term participants in Canadian equity markets. A new and different exchange that serves long term investors, one that strikes the right balance between liquidity, price discovery and cost efficiency, is very exciting for us."

Aequitas is also concerned about the impact certain trading strategies, coupled with prevailing market conditions and the lack of innovative solutions, have on early and mid-stage companies seeking to access capital. New solutions, focused on making the capital formation process for small and mid-cap companies more viable, need to be developed to nurture those companies that will fuel the growth of the Canadian economy.

"We are at a critical crossroads for our markets and we are committed to bringing solutions to enhance trust in capital markets, challenge the status quo, and foster an exchange framework that will help support and grow the Canadian economy," added Mills.

The Aequitas Mandate

"We have been given a clear mandate by our founding investors: to serve the collective interests of investors, issuers and intermediaries and, as a result, the public at large," stated Jos Schmitt, President and Chief Executive Officer of Aequitas. "We believe competition will enhance confidence in Canada's capital markets, but more of the same won't address the issues that exist. Instead, we will tap innovation and technology to promote liquidity, fairness, cost savings and economic growth. This is the vision upon which Aequitas has been founded."

Aequitas will deliver on its mandate by meeting four key objectives:

Always put the investor and issuer first, as directed by our balanced, broad and open ownership structure;
Ensure quality markets and allow for sustainable market making;
Introduce innovative and affordable services that foster meaningful competition, reduce costs and improve market efficiency; and
Provide all types of issuers with solutions to access the capital they need to grow.

The Aequitas Value Propositions

Schmitt continued: "Our solutions will be a highly differentiated set of services to meet the needs of the traditional investors and issuers. We seek to build a strong partnership between the exchange, issuers and market makers to promote true liquidity."

The Aequitas solutions will include:

New market structure solutions that seek to restrict predatory and opportunistic trading strategies while challenging the dominant make-take fee model;
Best-in-class smart order routing solutions available to all investors and dealers;
Liquidity through sustainable market making;
Highly competitive fee models across innovative trading, listings and market data offerings; and
A centralized platform for exempt market securities focused on providing liquidity and strengthening the capital formation process.

To learn more about the Aequitas solutions, please visit to read our Position Paper.

Moving Forward

Aequitas' proposal to operate an exchange is subject to regulatory review with a formal exchange recognition application to be filed. This filing is currently planned towards the end of 2013. In the mean time, the immediate next steps for Aequitas can be summarized in one word - dialogue:

Dialogue with investors and issuers to obtain further insights and ensure that our solutions truly address their issues and challenges;
Dialogue with dealers, in particular the smaller and mid-size firms, to ensure that our solutions will provide them with the relief they need;
Dialogue with regulators to explain our solutions and the benefit of enabling commercial solutions that will ensure more balanced and efficient Canadian capital markets that ultimately will lead to a stronger economy.

"Our ultimate objective is to improve market quality, promote fairness and foster economic growth with all market stakeholders in mind," concluded Schmitt. "To allow us to successfully execute upon this plan, market stakeholders' input is critical. We are looking forward to obtaining the industry's input and encourage all market participants to make their voices heard."

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