17 SEPTEMBER 2019, LONDON

Canada sets pace for new exchanges

Canada finds itself at the forefront of a new wave of stock exchanges and a push for increased focus on fairness and transparency for investors, following the recent regulatory approval of Canada’s newest stock exchange, the Aequitas NEO Exchange.

Canada sets pace for new exchanges

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Aequitas, which will compete with the country’s established stock platforms and whose goal is to curb the impact of harmful industry practices associated with high-frequency trading, was granted approval to begin operations in March by the Ontario Securities Commission.

The impending launch of Aequitas will see Canada join the United States and Europe as jurisdictions that have welcomed new markets that promise to change the way that securities are bought and sold.

“If you look at the industry and equity marketplaces overall, I think there is a clear acknowledgement by many market stakeholders that we have issues,” says Jos Schmitt, president and chief executive officer of the Aequitas NEO Exchange. “They relate to the fairness of the market, they relate to the liquidity of the market, they relate to the transparency of the market — and all of that is impacting not only investor confidence but also the appetite of capital-raising companies to go public.”

In the United States, the investor-led struggle against high-frequency trading has resulted in the creation of IEX Inc., billed as a “fair-access” equity trading venue owned by a group of large buy-side investors such as mutual funds and hedge funds, as well as, very recently, the Luminex initiative. Meanwhile, Europe has witnessed new initiatives, similar in nature, such as Plato Partnership Ltd.

“We see the emergence of a new type of marketplace and Aequitas, of course, is one of them — IEX in the U.S. is another one, along with Project Plato in Europe — that seek to create an environment that places the investor and issuer first again,” says Schmitt.

The Aequitas chief says a key difference between his exchange and existing trading platforms is how it views its role as intermediary between investors and securities issuers. “We have to remember why we’re here, the critical role we play in helping companies to find capital and in helping investors to create and generate wealth, and bring those two together in the most efficient way.”

Given the trading volume that high-frequency traders are credited with generating, traditional exchanges might view them as market makers that could support new, smaller issuers.

“The view of many exchanges was, ‘Do we really need market makers when HFTs are filling the role?’ But they are not, because their focus is mainly on active larger-cap securities, of which we don’t have many in Canada.”

The Aequitas chief notes that in the discussions and meetings he had prior to the formation of the rival stock exchange, he was told by both private and publicly listed businesses that they saw less and less reason to go or stay public. “The most common reaction that we picked up was, ‘the cost/benefit ratio of going public is no longer justifying it, we see the costs and the impact on our organization but we don’t see the liquidity benefit anymore.’”

The consequence of fewer Canadian companies willing or able to tap public markets for capital shows up in slower economic growth and employment, lost tax revenue and, potentially, the failure of those businesses if they are unable to tap other sources of investment.

The lack of reliable sources of capital for the country’s small and medium-sized businesses is a major concern of David Allan, a former governor of the Toronto Stock Exchange and current executive chairman of biotechnology development company AvidBiologics Inc. “As an issuer I have found the Toronto Stock Exchange to be a very poor portal for access to capital in terms of how it conducts itself.”

Allan, an investment industry veteran, was also the founding and sunset chairman of the Toronto Stock Exchange’s market access implementation committee that created improved access to public capital for small and medium-sized companies.

“Since that time, the TSX has regressed in terms of its interest in fostering and promoting capital formation. It doesn’t talk about it, it doesn’t get out there, it doesn’t enthuse on behalf of SMEs, which are driving growth of the economy.” “They don’t advocate anything other than ‘how do we run a profitable stock exchange,’ ” adds Allan. “Ever since the demutualization of the TSX, it has become strictly another business. There’s a dramatically different attitude inside the TSX than there was before, and I think that everything I have seen and heard firsthand from Aequitas is that their constitution of shareholders really re-mutualizes, if you like, the concept of the exchange.”

Andreas Park, an associate professor of economics and finance with the University of Toronto and a visiting professor at Copenhagen Business School, believes Aequitas’s approach, which seeks support from market participants, benefits Canadian companies looking to go public in ensuring the smooth functioning of the secondary market. “I think what Aequitas has in mind as a model … is broadly supported by institutional investors, so you have OMERS on board with it and also major brokerages like RBC on board with it.”

Park believes that the launch of the Aequitas exchange in March may also not be a bad thing for the TMX Group Inc., which currently has about a 74% share of trading across its exchanges that include the Toronto Stock Exchange, the TSX Venture Exchange and the Alpha Exchange. “It may actually benefit the TSX,” notes Park. “Aequitas adds an interesting option and may attract additional trading activity and listings to the Canadian market.”