* Backers include Royal Bank of Canada, country's largest
* Aequitas takes aim at high-frequency trading
* Expects to launch late next year
* Hopes to grab 20 pct of Canada equity trading market
* TMX Group shares down 1.4 pct in afternoon
(Adds response from TMX Group, fund manager and analyst
comment, TMX share price)
By Alastair Sharp and Euan Rocha
TORONTO, June 25 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, one
that would limit the role of controversial high-frequency
The new exchange operator, Aequitas Innovations Inc, will be
backed by Royal Bank of Canada 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.
Schmitt said Aequitas would shy away from a now-common fee
structure in which one side of a trade - typically an
algorithmic trader - receives a rebate for placing an order.
Exchanges often cover the cost of these with higher fees on the
other side of the trade, in many cases retail or institutional
Tom Caldwell, the chairman of Toronto's Caldwell Securities
and TMX rival Canadian National Stock Exchange, said he does not
see Aequitas as a big challenger, but expects they will come out
with some innovations.
"If I had to stereotype this - I think it is a big company
solution for big companies. So I think the primary focus is
going to be around going head-to-head with the TMX by providing
better filter-out systems for some of the abuses of
high-frequency trading," he said.
TMX SHARES SLIP
Asked to comment on the potential rival, TMX said in a
statement it was prepared and well-positioned to compete. Its
shares were off 1.4 percent at C$43.20 on Tuesday afternoon in a
broadly rising market.
"It might put some pressure on TMX shares closer to launch
as the news flow around it picks up," said Andrey Omelchak, a
portfolio manager with Montrusco Bolton, which owns 271,000
shares in TMX. "But they are not in a position at all to affect
TMX's business in any way that I can envision."
BMO Nesbitt Burns analyst John Reucassel wrote in a note to
clients that Aequitas would likely not hinder the TMX's growth
prospects in clearing, derivatives, listings and market data.
He also said that market share gains for the new entrant
would be limited by the absence of the big investment dealers
who back TMX Group.
TMX is controlled by a consortium of Canadian banks and
other financial institutions that thwarted a takeover bid by
London Stock Exchange Group. The consortium, known as
Maple Group, then combined the Canadian exchange operator with
Alpha and a trading clearinghouse.
RBC, the country's biggest lender, was one of the few
Canadian banks not involved in the consortium, as it had advised
the London Stock Exchange on its bid.
In addition to RBC, Aequitas is backed by Barclays Plc
, Canadian mutual fund managers CI Financial Corp
and IGM Financial Inc, pension fund PSP Public
Markets, and Investment Technology Group Inc.
"This is the first marketplace in existence that has more
investors around the boardroom table than it does brokers," ITG
Canada's CEO, Nick Thadaney, said in an interview.
(Additional reporting by Bhaswati Mukhopadhyay in Bangalore;
editing by Jeffrey Hodgson and Matthew Lewis)