Give private solutions time to work

In mid-August, the industry got a better look at what the company has in mind when the Ontario Securities Commission released a notice sketching out Aequitas’s proposed trading model. The notice highlights a variety of regulatory concerns, including worries about the new exchange’s possible impact on market quality, questions of fair access and concerns that the proposed exchange’s model may violate some of the fundamental principles underlying the existing trading rules.

Regulators are right to raise these issues, but they must also remember that their rules aren’t sacrosanct.

For example, the basic idea that markets shouldn’t be able to discriminate among traders is, on its face, sound. But when the concern is that predatory traders might be excluded under this proposed model, that seems like a compromise worth making – indeed, it would be absurd to insist on ensuring fair access for traders that have no intention of playing fair.

Of course, the regulators could do things on their own to address problems such as predatory high-frequency trading. But, as yet, they haven’t; and, given the risk of unintended consequences, they probably are wise not to try. Instead, regulators should give the industry a chance to solve its own problems, subject to adequate oversight.

The Aequitas venture may not have all the answers, and perhaps not everything the consortium is proposing should be allowed. But regulators should try to facilitate this sort of innovation rather than adhering rigidly to rules that made sense when they were crafted but now may need revising.

Indeed, while much of the rhetoric coming out of Aequitas seems a bit overwrought, if the venture can achieve even half of what it promises, it will be a welcome addition to the equities trading landscape in Canada.

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