‘Flash Boys’ Fight Moves to Canada With New Market About to Open

Michael Lewis’s 2014 book, “Flash Boys,” documented efforts to fix the purportedly rigged U.S. stock market. Next week, an upstart exchange will bring that fight to Canada.

Aequitas Innovations Inc. is opening the Neo Exchange on March 27, challenging TMX Group Ltd.’s stranglehold on the $2 trillion Canadian equity market. The platform’s rules and infrastructure are designed to blunt trading practices it deems predatory, and it’s taking its pitch to corporations seeking a different kind of market where they can list their stocks.

TMX runs the dominant platform, the Toronto Stock Exchange, that companies call home in Canada. Aequitas wants to upend that status quo, drawing in companies and investors disillusioned by an equity market that is increasingly unfair, according to Chief Executive Officer Jos Schmitt.

“We want to get rid of the perception that markets are a black box,” Schmitt said during an interview this week at his Toronto office. “This exchange stands for fairness, liquidity and transparency. There’s lots of opportunities today to be successful because that’s what the market is asking for. A new generation, a new wave of marketplaces is emerging.”

The Neo Exchange joins its neighbor, New York-based IEX Group Inc., in seeking to change how trading works. IEX was made famous by Lewis, who documented how the upstart market was eliminating advantages its founders felt were being unfairly enjoyed by computerized traders -- often called high-frequency traders. The goals of Aequitas and IEX are similar, though the Aequitas push to win corporate listings, starting in the second quarter, is a key difference.

‘Parallel But Separate’

“Everyone has heard of IEX,” Schmitt said. “We are on parallel but separate paths.”

TMX dominates Canadian trading, with its markets accounting for about 75 percent of the nation’s volume, according to the Investment Industry Regulatory Organization of Canada. Providing services to listed companies, including fees for new listings and ongoing expenses, generated C$198.3 million ($156 million) of revenue in 2014 for TMX. That makes it the second-biggest source of sales at the exchange, trailing only trading.

TMX’s recent proposals to curb high-frequency traders, on track to debut in June, will help improve liquidity for listed companies, said Kevan Cowan, president of TSX Markets. In October, the company said its Alpha market will introduce speed bumps and impose a minimum size for orders.

Taken Seriously

“We take all competition seriously,” Cowan said during an interview. “For any new competitor, you have a choice. You either talk your own features, or you attack the incumbent. The most recent entrant has a certain approach to that. Other competitors in the marketplace are quite different.”

Aequitas, whose backers include Royal Bank of Canada and Barclays Plc, plans to draw customers by charging lower fees, working more closely with companies during and after the listings process, and also giving some real-time market data for free to retail and professional investors. Neo will only list companies with at least C$50 million of market capitalization and proven track records of profitability.

The exchange has received interest from both domestic and foreign companies, including some that are already publicly traded, Schmitt said.

“If people think it’s a fairer market to trade in, that could attract more international listings,” said Douglas Cumming, a professor of finance at Schulich School of Business in Toronto.

Energy Stocks

Energy producers, which account for about 21 percent of the benchmark Standard & Poor’s/TSX Composite Index, have slumped 26 percent as crude prices plunged from June highs. As a result, Aequitas sees an opportunity to raise the profile of companies outside the natural resources arena, diversifying the Canadian equity market. The goal is about 20 percent market share for Neo within the next four to five years, Schmitt said.

Frank Maeba, managing partner at Breton Hill Capital in Toronto, said he’ll be watching when Aequitas flips the switch to see if the new market makes a difference.

“It’ll be very interesting to see what the impact is putting simultaneous trades in a regular exchange with HFT and in Aequitas,” he said. Maeba’s firm manages about C$850 million. “People have speculated if you take HFTs out of the equation, do you get better execution? This will be a really good acid test.”

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