Regulators Rebuff Aequitas Curbs on ‘Predatory’ Trading

Securities regulators raised objections to Aequitas Innovations Inc.’s proposal for a new Canadian stock exchange, dealing a blow to its attempt to start a venue that would curb high-speed trading practices. The group will file a revised plan.

Aequitas was formed last year to create a new Canadian stock exchange that discourages “predatory” techniques used by automated trading firms, arguing they were hurting other investors. The Ontario Securities Commission said today that the restrictions the group proposed ran afoul of regulations that demand all traders get equal access to orders.

“What they wanted to do was exclude what they deemed was abusive, but what that means is not everybody has equal access to the exchange, and that was always going to be a problem,” said Thomas Caldwell, chief executive officer of Caldwell Securities Ltd., which manages about C$1 billion ($915 million).

To response to the action, Aequitas announced a series of revisions to its proposed rules. The firm, backed by firms including Royal Bank of Canada (RY), now aims to make certain high-frequency trading techniques unprofitable through fees and unspecified “speed bumps,” according to a statement today. The Toronto-based company anticipates submitting its formal application to open an exchange this quarter, with a goal of opening the market in the first half of 2015.

Better Solution

“The solution we have now is even better than the one we had before,” Jos Schmitt, the CEO of Aequitas, said during a phone interview today. “We are now at a stage where it fits the current regulatory environment.”

TMX Group Ltd. (X), whose markets handle about 80 percent of Canadian stock trading, had opposed Aequitas’s initial proposals last year. TMX CEO Thomas Kloet said during an interview in October that Aequitas’s desire to treat each class of investor differently was probably against the law.

“Securities law has a core proposition that everybody should have equal access,” Kloet said at the time.

Aequitas was founded by Royal Bank, Barclays Plc (BARC), BCE Inc. (BCE), Ontario Municipal Employees Retirement System, CI Financial Corp. (CIX), IGM Financial Inc. (IGM), Investment Technology Group Inc. (ITG), and Public Sector Pension Investment Board.

The Ontario Securities Commission said in its statement today that it couldn’t support Aequitas’s plans as initially formulated.

“In particular, the proposal included restrictions on access to visible orders which do not conform to existing requirements of the regulatory framework, including fair access,” the OSC said.

“TMX Group is pleased to see that both regulators and industry participants recognize the importance of protecting the market’s core underlying principles,” spokeswoman Carolyn Quick said today in an e-mailed statement.

To contact the reporters on this story: Eric Lam in Toronto at elam87@bloomberg.net; Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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