Royal Bank Leads Group Setting Up New Stock Exchange

Royal Bank of Canada, the country’s biggest bank, is leading a group of investors and brokers creating a new Canadian stock exchange to compete with TMX Group Ltd.’s Toronto Stock Exchange.

The bourse, to be run by a venture called Aequitas Innovations Inc., is also backed by Barclays Plc, CI Financial Corp., IGM Financial Inc., ITG Canada Corp. and PSP Public Markets Inc., according to a statement today. The group will file an application to regulators by the end of the year.

Aequitas will be led by Chief Executive Officer Jos Schmitt, who started Alpha Group as a rival platform to TMX about four years ago. He left the company in October after a dozen pension funds and major lenders, excluding Royal Bank, bought Alpha along with Canadian Depository for Securities Ltd. to combine with TMX in a C$3.73 billion ($3.54 billion) deal.

“Alpha was created, initiated by dealers to put competitive pressure on the incumbent exchange and it was all about a cost play,” Schmitt said in a phone interview. “If you look at Aequitas, it’s all about the issuers, the investors and the dealers coming together and saying ’we need to tackle some fundamental challenges in our markets.’”

TMX fell 2.3 percent to C$42.80 at 4 p.m. in Toronto, and has slumped 16 percent this year. Toronto-based Royal Bank gained 1.3 percent to C$60.15.

Aequitas Plans

Aequitas plans to challenge “certain predatory high frequency trading strategies which have impacted the quality of existing equity markets,” Greg Mills, chairman of Aequitas and co-head of global equities within Royal Bank’s RBC Capital Markets unit, said in a statement. “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.”

High frequency trading uses computer algorithms to execute small trades in less than a second, and the new exchange will seek to limit these strategies, according to the statement.

“TMX will feel some pressure,” Shubha Khan, an analyst with National Bank Financial, said by phone from Toronto. “I don’t know that there’s any other reason for the creation of the exchange other than to curb high-frequency trading activity, which is believed to have distorted market activity.”

TMX, which operates the Toronto Stock Exchange, Venture exchange, TMX Select alternative trading system and Alpha, holds about 85 percent market share as of March, according to data from the company.

Competitive Market

Carolyn Quick, a spokeswoman with Toronto-based TMX, said CEO Tom Kloet and Kevan Cowan, president of TSX Markets and group head of equities, are hosting a Trade Canada conference in London today and are unavailable for comment.

“The Canadian marketplace is certainly a competitive one and the news of a new market entrant is not unexpected,” Quick said in an e-mail. “We are both prepared and well-positioned to compete effectively.”

Gillian McArdle, spokeswoman with RBC Capital Markets, said the aim of the exchange is to foster “a more level playing field” for market participants.

“We believe Aequitas will become an effective competitor within the Canadian equity market landscape,” McArdle said in a phone interview.

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