OTTAWA â€" A group led by the Royal Bank of Canada on Tuesday announced plans to set up a rival to the Toronto Stock Exchange, with the aim of circumventing the rapid trading systems that have come to heavily influence the markets.
R.B.C., Canada’s largest financial institution, found itself on the outside last year after a consortium that included most of Canada’s other major banks acquired the TMX Group, the parent company of the Toronto exchange and the dominant force in Canadian equity trading
In an effort to distinguish itself from the long-established exchange, the consortium has developed software systems it says will curb or eliminate the ability of computerized, high frequency trading, which hit exchanges with tens of thousands of orders each second in order to take advantage of small discrepancies in stock prices.
The new company will be called Aequitas Innovations and its partnes include Barclays.
“It’s not more of the same,†Jos Schmidt the chief executive of Aequitas said in an interview. “More of the same would not be adding any value.â€
A study published by the Investment Industry Regulatory Agency of Canada last year found that 42 percent of Canadian trades appeared to involve high-frequency trading. Such trading has been a cause of study and concern in many countries, including the United States, and Europe and Germany developing rules and legislation to regulate the practice
Supporters of high-frequency trading say that it creates efficient markets by narrowing the gaps between bid and ask prices and increases liquidity. But regulators and other investors are concerned that the systems increase volatility and ! instability, shut out small retail investors, force brokerage houses into a costly technology arms race and create several potential avenues of abuse and manipulation.
To curb high-frequency trades, Aequitas will introduce new rules and use software it has developed to, among other things, block specific kinds of small orders many high frequency traders use to determine the intentions of major funds.
Mr. Schmidt said that Aequitas has applied for patents on its software and that it hopes to sell it to exchanges in other countries.
Eric Kirzner, a professor of finance at the University of Toronto’s Rotman School of Management, said that while competition would be welcomed in Canada, he was less certain about how practical it would be to rein in high-frequency trading.
After much study he said he remained uncertain about what restrictions should be employed.
“This begs the question about whether they will be able to distinguish between acceptable kinds of high frequency tradig and those that are predatory,†he said. “It seems to be a very tall order but there are good technology people out there.â€
The new exchange plans to offer a different fee structure than the Toronto exchange which should lower costs for many investors and introduce a junior market for companies that are too small to launch initial public offerings.
In addition to Barclays, the consortium’s partners include PSP Public Markets, the pension fund manager for Canada’s public service and military; CI Investments, a money management firm; the Canadian branch of New York based ITG; and IGM Financial, a major Canadian mutual fund manager. The group will apply for regulatory approval later this year.
