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Jos Schmitt, president and chief executive officer of Aequitas Innovations, is pictured in the operations room of the company’s Toronto offices on Wednesday.Chris Young/The Globe and Mail

Few people dare say it publicly, but the impending launch of a new trading venue in Canada comes with one glaring question: Will it actually change anything?

Come Friday, Aequitas Innovations Inc. will cap its two-year journey to create a new stock market. Backed by major financial institutions, including Royal Bank of Canada and CI Investments Inc., Aequitas will flip the switch on its trading system and start taking on the Toronto Stock Exchange, which currently enjoys near-monopoly status across the country.

Many of Aequitas's supporters are frustrated with the current equities market, arguing its structure allows TMX Group Ltd., which runs the TSX, to charge exorbitant fees for crucial trading data. They are also annoyed with the level of high-frequency trading in Canada – a client base TMX caters to with its pricing model for trades.

To spice things up, Aequitas is not only launching an alternative trading platform, where buyers and sellers can swap shares for cash, but its venue is also designed to level the playing field with HFTs. These traders enjoy speed advantages, and Aequitas will feature an automated "speed bump" that ensures anyone who uses its system will have the same access to bid and ask prices.

Traders are timid when it comes to going on the record about their expectations for Aequitas – largely because the firms they work for either own it, or the TMX, which is owned by a consortium of banks – but they often snicker at the new entrant in private. It's not that they don't want things to change; it's just that they've seen rival platforms emerge before, yet TMX still dominates.

"Aequitas's drive for transparency is always a good idea; however, at the end of the day, liquidity is usually what wins," one said, adding that Canada "isn't big enough to support several different markets."

TMX currently accounts for the vast majority of trading volumes – its current market share hovers around 75 per cent – which means its exchanges offer traders the best chance of executing their orders. Liquidity boils down to simple supply and demand: If TMX has the most bids and offers, it's the most likely venue for generating their trades.

The assumption with Aequitas is that its high-profile backers will deliver strong order flow to its own trading platform. However, that same attitude existed when a group of financial institutions banded together in 2007 to launch Alpha, an alternative trading venue, and its weaknesses were eventually exposed.

Although Alpha ultimately generated between 20 and 30 per cent of Canadian trading volumes, the assumption that exchange owners are free to send their orders wherever they choose is somewhat flawed. "Best execution" rules set by regulators require that traders must get the best price for their clients – even if it exists on a rival market. The best price is more likely to be on the venue with the most liquidity, which HFTs provide, for better or worse.

Jos Schmitt, who runs Aequitas and previously ran Alpha, has heard many of these worries. To those who believe the Alpha experiment was proof that Canada isn't big enough for two markets, he swears Aequitas is a much different beast.

"If we had set up something similar to Alpha, we would not have had any support," he admits. "The Alpha play was a cost-play" – meaning it was designed mostly to create some competition that would force TMX to lower fees.

Aequitas, meanwhile, was designed in a "new era of exchanges … driven by a totally different set of principles," he said. The management team's assertion is that investors don't trust equity markets any more, so they've based the pitch for their exchange on fairness, liquidity and transparency.

Many believe Aequitas will provide some decent competition, but that the TMX will ultimately adapt. Already, TMX plans to implement a speed bump of its own on Alpha. And should Aequitas become a major threat, there is an assumption that TMX will simply buy it, the way it bought Alpha in 2012.

However well intentioned, Mr. Schmitt and his team must wrestle with an inherent problem – that Canada is a small country. Major industries such as banking and telecommunications have long had established companies that make it incredibly tough for new entrants to break in. This may be another chapter in a depressingly familiar story.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
RY-N
Royal Bank of Canada
+0.48%100.88
RY-T
Royal Bank of Canada
+0.29%136.62
X-T
TMX Group Ltd
-1.98%35.73

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