Bloomberg News

Royal Bank Bourse to Test TMX’s Rapid Trading: Corporate Canada

June 26, 2013

Royal Bank of Canada, left out of a banking group that bought the Toronto Stock Exchange last year, is betting a new exchange will take business from Canada’s largest bourse.

Canada’s biggest bank teamed up with two of the country’s largest mutual fund dealers to create Aequitas Innovations Inc., with a plan to target investors who are concerned about the rise of high-frequency trading on traditional markets.

“You have a new competitor in the game which is a big kid,” said Thomas Caldwell, Toronto-based chief executive officer of Caldwell Securities Ltd., which oversees C$1 billion ($950 million) including shares of Toronto exchange owner TMX Group Ltd. (X) “They probably have a good shot at it. They will make a mark for themselves.”

Royal Bank and its five partners are trying to emulate the success of bank-led exchanges in Europe and the U.S. that have taken market share from former monopolies such as the New York Stock Exchange.

Stock trading in the U.S. is spread among 13 exchanges and dozens of private venues such as so-called dark pools that are operated by brokers. Once dominated by the NYSE and Nasdaq Stock Market, U.S. markets have fragmented as a result of regulatory changes aimed at fostering competition and lowering costs to investors.

Market Share

Venues operated by Lenexa, Kansas-based Bats Global Markets Inc. and Direct Edge Holdings LLC in Jersey City, New Jersey, didn’t exist a decade ago and now handle about 20 percent of U.S. trading volume.

In Canada, the TMX Group had about 81 percent of equity trading by volume as of May, according to data from the Investment Industry Regulatory Organization of Canada. The Maple Group of banks, pension funds and insurers bought Alpha Group as part of its takeover of the Toronto Stock Exchange in 2012. The incumbent may lose ground to the Royal Bank-led group.

“TMX will feel some pressure,” Shubha Khan, a Toronto-based analyst at National Bank Financial, said by phone. “I don’t know that there’s any other reason for the creation of the exchange other than to curb high-frequency trading.”

TMX fell 2.3 percent to C$42.80 yesterday in Toronto, its lowest since September. The shares have slumped 16 percent this year.

London Advisers

Royal Bank and Bank of Montreal were the only two banks among Canada’s six largest lenders that weren’t involved when the Maple Group acquired TMX. Toronto-Dominion Bank, Bank of Nova Scotia and Manulife Financial Corp. are among the Toronto exchange’s owners.

Royal Bank advised the London Stock Exchange Group Plc (LSE) on a competing bid for the Toronto bourse, while Bank of Montreal, Canada’s fourth-biggest bank, was working with TMX.

Paul Deegan, a Bank of Montreal spokesman, declined to comment on whether the Toronto-based lender was approached by Aequitas.

The aim of the exchange is to foster “a more level playing field” for market participants, Gillian McArdle, an RBC Capital Markets spokeswoman, said yesterday in a telephone interview. “We believe Aequitas will become an effective competitor within the Canadian equity market landscape.”

Aequitas is also backed by London-based Barclays Plc, Toronto investment firm CI Financial Corp. and IGM Financial Inc. (IGM) of Winnipeg, Manitoba, Canada’s largest mutual fund company by market value.

‘12 Seconds’

ITG Canada Corp., which is part of New York-based brokerage Investment Technology Group Inc., and pension manager PSP Public Markets Inc. also hold stakes in the proposed exchange. The group will file an application to regulators by the end of the year.

Aequitas will compete with the largest stock market in Canada by bringing individual investors back into the market, Nick Thadaney, CEO of ITG Canada, said in a phone interview.

“The fastest marketplace in the world does nothing for long-term investors,” Thadaney said. “Someone who holds a stock for 12 seconds is not a real investor. If you feel the game is rigged and the market isn’t fair, you won’t want to play.”

Thadaney said Aequitas may try to thwart high-frequency firms by avoiding a pricing system used on many venues that pays rebates to traders for supplying bids and offers to buy and sell. Critics of electronic markets sometimes point to this practice, known as maker-taker, as encouraging excesses such as rapid-fire buying and selling of stocks.

‘The Pie’

Aequitas is probably aiming to do more than just steal market share from TMX, according to Adam Sussman, a partner at Tabb Group in Boston. They may hope their venue will encourage trading that wouldn’t have occurred in the past.

“You can always grow the size of the pie too,” Sussman said. “That has to be part of their hope. They’re looking at this not just as a displacement strategy but for organic growth as well.”

Carolyn Quick, a spokeswoman for Toronto-based TMX, said yesterday that CEO Tom Kloet and Kevan Cowan, president of TSX Markets and group head of equities, were hosting a Trade Canada conference in London and were unavailable to 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.”

‘Competitive Pressure’

Aequitas will be led by CEO Jos Schmitt, who started Alpha Group as a rival platform to TMX about four years ago. He left the company in October after the C$3.73 billion TMX deal was complete.

“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.’”

The new bourse may force TMX to keep a lid on listing fees, though it may struggle to attract liquidity, said Andrey Omelchak, who helps manage C$5.6 billion at Montrusco Bolton Inc. in Montreal.

“I don’t expect any companies to delist from TMX and list there,” he said. “Liquidity attracts liquidity and it’s always an uphill battle starting a new exchange.” Montrusco owns TMX shares.

IGM Financial, which runs C$127.1 billion, is one of the backers of Aequitas yet it won’t be moving all its trading to the new bourse, said Scott Penman, CEO of IGM’s Investors Group unit.

“Competition is the right solution, choice is the right solution,” Penman said.

To contact the reporter on this story: Eric Lam in Toronto at elam87@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net


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