The plan to create a new exchange that deters predatory high-frequency trading (HFT) strategies is moving ahead, albeit with some modifications to the proposed model designed to satisfy skeptical regulators.
Last year, Aequitas Innovations Inc. announced its intention to develop a new exchange, and offer a novel trading model, that would, among other things, deter predatory HFT. The plan was spelled out in a regulatory pre-filing that drew support from many in the industry, but also attracted its share of criticism; and, regulators had concerns with certain aspects of the proposal too.
The primary issue centred around its plans for a “hybrid book” that would combine some of the features of a traditional lit exchange with those of a dark pool, which didn’t fit within the existing regulatory framework. Today, the Ontario Securities Commission (OSC) issued a notice indicating that, after reviewing the proposal and the comments, it informed Aequitas that it could not support its original plans.
“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 notes.
However, in light of this decision, Aequitas is now planning to go ahead with a revised proposal. The OSC says that the firm has submitted an amended proposal that aims to address the concerns it raised. This alternative proposal will be published for comment as part of a full exchange recognition application, it reports; and, comments will be requested on the revised proposal at that time.
Aequitas says that its exchange application will include amendments to its proposed mechanism to prevent predatory HFT strategies from taking liquidity in the hybrid book, by making these strategies uneconomic through a combination of trading fees and speed-bumps, rather than restricting access. It also says that it will alter its approach to identifying predatory HFT “to ensure it will not be impacted by the potential abuse or other shortcomings of the short marking exempt (SME) regulatory marker.”
Additionally, clients with direct electronic access (DEA) will not be allowed to act as designated market makers, as it originally proposed; and, the execution priority of designated market makers will be capped “to avoid the potential risk of ‘crowding out the quote’,” the firm says in its own announcement.
Aequitas says that it believes that its amended proposal “not only meets the current regulatory framework requirements but strengthens its value proposition for the industry.” The firm also says that all of its founding shareholders, which includes various buy- and sell-side firms have approved its business plan, and its decision to proceed with the amended offering.
The firm indicates that its exchange application will be published in the first quarter of this year, and that it aims to rollout all of its services over the first half of 2015.
“We are very enthusiastic to begin building our new solutions for Canada’s capital market as we believe they will be true game changers,” said Jos Schmitt, CEO of Aequitas. “We are very thankful to the industry and the regulators for all their feedback. Their engagement led us to a series of amendments which will allow us to even more effectively deliver on our mandate to build innovative solutions, create meaningful choice and competition, enhance market fairness by curbing predatory high frequency trading, and address capital raising issues.”
“During this next phase we encourage everyone to continue to make their voice heard and influence the future of Canada’s equity markets,” added Schmitt. “Our mandate will always ensure the needs of the investors and issuers are put first as we remain steadfast in our commitment to restore focus on the original purpose of an exchange – creating a fair market for all, enabling stronger companies, both small and big, and facilitating the growth of the Canadian economy.”