Earnest New Canadian Stock Exchange Stresses Personal Responsibility, Slower Pace Of Life

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Nostalgia can be a surprisingly powerful force in marketing financial products, and without knowing much about it I have high hopes for this new Canadian stock exchange? It's like a regular stock exchange (in Canada), only they won't allow high-frequency trading. I mean, they will allow it, but not the bad kind:

Aequitas plans to challenge “certain predatory high frequency trading strategies which have impacted the quality of existing equity markets,” Greg Mills, chairman of Aequitas and co-head, global equities at Royal Bank’s asset management unit, said in a statement. “Marketplaces in Canada and around the globe are increasingly out of sync with their traditional users as they attract and cater to volume and revenue-generating trading over traditional investors.”

You can read their position paper here if that's your thing. It seems very worthwhile and Canadian, with an interesting mix of old-timey things (market makers would have performance obligations for their securities of responsibility) and concessions to current high-speed trading realities, but with a general emphasis on being a market for Investors and Issuers as opposed to Speculative Jerks.

I feel like that will go well? People really viscerally dislike high frequency traders, who do things like get consumer confidence data two seconds early and, um, turn the public equity markets into casinos or whatever, forcing businessmen like Michael Dell to pack up their Dells and head for private ownership. Issuers, in particular, worry about putting their shares in the robotic hands of high-frequency traders whose behavior they don't understand and who sometimes ">mini-flash-crash them.1 Aequitas blames the decline in Canadian IPOs largely on the abuses of modern markets:

Markets being markets, you'd expect someone to find ways for issuers to avoid the horrors of public listings while still raising public capital. And you do see some tinkering with the governance expectations of public equity: now companies can go public without pesky things like fiduciary duties or shareholder voting. But while governance is fairly customizable, allowing companies to go public without a lot of the listening-to-shareholders aspects of public ownership, not a lot has been done to let companies opt out of the standard form of public trading. What if you want to get public shareholders but not allow short selling of your stock? Trade in five-cent increments? Ban high-frequency trading? Avoid mini-flash crashes?

There's been a little tinkering with those questions too - Nasdaq is plotting a customizable private market, and Aequitas has a similar emerging-companies plan in the works2 - but mostly you get the exchanges that everyone else gets. Which for a combination of regulatory reasons (regulators want everyone to be able to trade at the national best bid or offer) and business reasons (high-frequency traders are exchanges' best customers) means that you get a pretty HFT-y market. And if you're like a lot of issuers you dislike it.

So Aequitas is an alternative. Sort of? Maybe? I don't know. I mean the thing is that a lot of that standardization is driven by regulatory requirements that unify national markets, and much of the rest is driven by competitive dynamics. Aequitas's order books will be integrated with other, scarier, markets, so issuers can't opt out of HFT entirely. And Aequitas's intention of "challenging the dominant make-­take fee model" - in which HFTs basically get paid by exchanges for trading a lot - doesn't stop it from, um, having a maker/taker fee model.3

But so what? This is about marketing as much as anything else, and financial marketing isn't just about financial results. Intentions matter; nostalgia matters. Sometimes you want your mutual fund to be run by a guy in Omaha named Wally who takes the time to understand each stock and quote it to you in fractions rather than pennies. Other times, you want your stock exchange to be the kind of stock exchange with old-fashioned values, an exchange that frowns upon predatory high-frequency trading and asks market-makers to take responsibility for the liquidity they provide. Whether or not it has any effect, doesn't that sound like the sort of market where you'd want to list your shares?

Royal Bank Leads Group Setting Up New Stock Exchange [Bloomberg]
Leading Market Participants Join to Form New Canadian Stock Exchange [Aequitas]
Aequitas Innovations Position Paper: Innovation for Fair Markets [Aequitas]

1.Nah, per that link, that's mostly humans, though ... I dunno? I feel like, not a lot of trades at a penny on the auld NYSE floor?

2.And for investors there are dark pools of course, but that doesn't help issuers; you can't IPO into a dark pool.

3.E.g. (from the position paper):

The Aequitas Lit book is a more traditional lit book without any participant restrictions. It will offer the dominant maker­‐taker pricing mechanism employed by many lit marketplaces. ...The Aequitas Lit book, in recognition of the clear role maker-­taker continues to play in our marketplace, will offer fees commensurate with those of Canada’s other make­‐take marketplaces. That said, Aequitas believes that its suite of offerings and eco-­system will apply material competitive pressure on the make­‐take model in general which it believes will moderate industry dependence on this pricing scheme over time.

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