Launched in March 2015, the Aequitas Neo Exchange
based in Toronto has enjoyed a solid first year in operation. Recently it added its first listing, Invesco Canada’s PowerShares DWA Global Momentum Index ETF, which has allowed it to build a market share of over 28% for ETFs, and over 6% for total Canadian securities.
For the exchange’s CEO Jos Schmitt, the success of NEO is no surprise. Rather, it confirms that his criticisms of the monopoly power wielded by the TMX Group were wholly valid.
Speaking to Wealth Professional at the Responsible Investment Association’s conference in Toronto this week, Schmitt outlined the motivation for starting the index.
“We did an assessment of how the Canadian capital markets were operating and the role of the exchanges,” he said. “We noticed there were major fairness issues because the exchanges only cared about high-frequency traders. That is because they generated volume, so they focused on them and forgot about the other stakeholders.”
In Schmitt’s view, the malign influence of the high-frequency traders was a major problem with the TSX, but far from the only one.
“Liquidity in the Canadian market is deteriorating because high-frequency traders are not market-makers,” he said. “They are liquidity providers, but only where it works for them. We also saw companies going public that never should have. Add in the cost of doing business in Canada being so high, and we decided we needed to address it, and the way to address these issues is through competition and innovation. That is why we launched the exchange.”
Addressing attendees at the RIA conference at the Hyatt Regency, Schmitt spoke about the role exchanges could have in the area of responsible investing. For him, behaving ethically is not inverse to making a profit and having a successful business, rather it is central to it.
“At the end of the day, we are a for-profit organisation – we are not a charity,” he said. “What you have to ask yourself as a company is how you look at profit generation. For us it’s not about maximising short-term profitability. It’s about maximising the quality of the service we provide to our stakeholders, issuers investors and dealers. If you do what is right for these people, then you are going to become very successful.”
Now heading his own exchange in Canada, something that had previously been the sole preserve of the TMX Group, Schmitt explains the opportunity such a position allows him.
“We are in an incredible position to facilitate change for the better in capital markets,” he said. “We are tackling predatory trading and it is working. That is good for both the investor and the issuer. Also, we can make markets more transparent, you can do that through your listing requirements and the way you approach market data.”
Data, or information, is key for Schmitt. It is the lifeblood of the industry and something that should be protected at all costs. The consequences for withholding information, for investors and everyone else, are monumental, so the NEO Exchange head is adamant about the need for full transparency.
“When I look at responsible investment, whether it’s environmental, societal or governance it’s information that investors should be entitled to know about,” he said. “As an exchange, whenever you do that, it is going to make an investor better informed and create more transparency. That is good for everyone. Ultimately business will go to the exchanges that are doing what investors want. Doing what is right is not going against being a successful company – it is the way to become a successful company.”