Promises, promises: Advisors react to predatory trading concerns

Competition is great, but advisors are skeptical whether the stock exchange proposed by RBC would really help business by limiting high frequency trading.

Advisors say a new stock exchange proposed by an RBC-led group could loosen the grip of the TSX, but doubt whether promised limits on high frequency trading (HFT) represent a win for retail clients.

“I’m all open for competition, if they want to put a new exchange in and people who want to trade securities feel that they will get better liquidity or better pricing from those shares on the new exchange, then why not?” said Karl Schempp, senior investment advisor with Industrial Alliance Securities in Burlington.

However, Schempp adds that he hasn't seen any true demonstration of real damage from HFT, and questions whether the consortium's claims are more for public-relations reasons. “If their goal is to launch a competing exchange, they could be using the HFT [argument] as it helps support their position for a second exchange.”

The consortium announced its intention to launch a new equity exchange to take on the Toronto Stock Exchange (TSX) and to target what it calls predatory HFT, a form of computerized high-volume trading. Continued on Pg. 2.






The consortium said it had formed a venture named Aequitas Innovations, which will establish a new 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.”

While more competition may be welcome, the proof of Aequitas' claims will be in the pudding. Even though competition with the TSE could be beneficial, it remains to be seen whether a second exchange could attract listings and build liquidity.

“In a way more competition would be good,” said David Janzen a financial planner with Premier Financial in Brandon, Man. “But I’m not entirely sure that Canada needs or could handle another stock exchange; I really don’t know how necessary it is.”

With high-volume trading, an exchange can be bombarded by tens of thousands of orders in seconds in an attempt to take advantage of small variations in prices. Advocates of HFT say it promotes efficient market pricing, price discovery and liquidity.

Critics argue that it may cause instability, that it can shut out small investors in favor of large firms who can afford to place massive orders based on proprietary computer algorithms.

“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 for RBC Capital Markets.

Aequitas is backed by founding investors RBC, Barclays Corp, CI Investments Inc, IGM Financial Inc, ITG Canada Corp and PSP Public 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,” Mills said. “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 said it will particularly target what it referred to as predatory high-frequency trading (HFT) strategies, such as latency arbitrage, rebate arbitrage and exploratory trading, that impair the quality of execution for retail and institutional investors, including holders of pension plans and mutual funds.

The consortium says these strategies also negatively impact the liquidity of listed securities by discouraging true market makers and result in excessive costs falling squarely on investors, issuers and the networks that support them.

The TMX Group – which owns the TSE, the TSX Venture Exchange, Montreal Stock Exchange and others – is owned by The Maple Group, a consortium of major Canadian banks and financial institutions.