aequitas innovations position paper 240613
TRANSCRIPT
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AequitasInnovationsInc.InnovationforFairMarketsAequitas[ekwits]:FairnessinLatin
TheDemocracyoftheMarketsismoreofanIllusionthanaRealityCNBCFreeMarketsFairMarketsJune,2013
AequitasInnovationsInc.isaCanadiancorporationthatwillseektoapplyinnovation,technologyandcompetitiontopromotefairnessinthemarketsandfairnesstowardsthetraditionalinvestorsandissuersthecornerstonesofoureconomy.
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TableofContents
TableofContents.........................................................................................................................................2
1. IntroducingAequitas.............................................................................................................................3
a) TheInitiativeLeaders.......................................................................................................................3
b) TheRationale...................................................................................................................................3
c) AchievingTheMission......................................................................................................................4
2. TheAequitasStrategy...........................................................................................................................5
a) InnovationtoAddressChallenges....................................................................................................5
b) AnewApproachtoMarketStructure..............................................................................................5
I. AequitasDark..6
II. AequitasHybrid..7
III. AequitasLit8
c) SustainableMarketMaking..............................................................................................................9
d) BestinClassSORServicestoEmpowerInvestors...........................................................................9
e) AddressingtheCostIssues...............................................................................................................9
f) ACapitalFormationProcessinTunewithIssuersandInvestors....................................................10
3. CanadianMarketplaces,theNeedforImprovement.........................................................................11
a) InvestorsandMarketMakers,insearchofabalancedPlayingField............................................11
b) PublicListings,ontheDecline.......................................................................................................15
c) CapitalFormationforSmallandMid-SizeCorporations,aStruggle..............................................16
d) Dealers,asustainabilityChallenge................................................................................................16
4. NextSteps...........................................................................................................................................18
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1.IntroducingAequitasa) TheInitiativeLeaders
TheMissionStatementofAequitasInnovationsInc.(Aequitas)is:
Aequitaswasfoundedbyagroupofstakeholderswhobelievetoday'sequitymarketplacesdonotprovidethepublicwiththefairness,efficiencyandchoicethatencourageconfidenceandparticipationbyinvestors,issuersanddealers.Theconcentrationofservices,the
dominantmarketstructuremodelandlackofinnovationareattheheartofthisproblem.
Ourstakeholdersincludeprofessionalmoneymanagers,pensionfunds,sell-sideinstitutionsandissuerswhobelievechoice,drivenbycompetitionandbuiltondifferentiationandinnovation,isacutelyneededinCanadianequitymarkets.Thelackthereofthreatensthelong-termhealthofourequitymarkets,andtherefore,ultimately,economicgrowthandemployment.InAequitas,marketparticipantleadershavejoinedforceswiththegoalofestablishingacommercialenterprisewhoseprimeobjectiveistomoreequitablyservethecollectiveneedsofinvestors,issuers,andintermediariesand,asaresult,thepublicatlarge.
b) TheRationaleOneoftheconsequencesoftheglobalphenomenonofdemutualizationofstockexchangeshasbeenthatexchangesandalternativetradingvenuesarenowgearedtomaximizetheirshort-termprofitabilityattheexpenseoflonger-termobjectivesandtheneedsoftheirmostimportantstakeholders:investorsandissuers.
Todaythesevenuescatertovolumegeneratingelectronictradingfirms(HighFrequencyTradersHFTs)andincreasinglytakeinvestor,issueranddealerparticipationforgranted.Thiscontinuesdespitelowinvestorconfidence,companiescapitalraisingchallengesandthecostchallengesofmanydealersfocusedonservicingthem.
ThissituationhasbeenexacerbatedintheCanadiancontextbytherecentmovetowardsalargeconcentrationofservicesinasinglemarketplace:TheTMXGroup1.
1 TheTMXGroupaccountsforapproximately85%oftheequitytrading,100%ofthe tradingofexchangetradedoptionsand futures
contracts,100%oftheclearingofequity,fixedincome,andderivativesinstruments,95%of theequitylistingsandover85%of the
marketdatafeesinCanada.
To create an exchange in Canada that provides an innovative and cost-efficient
marketplacewhich protects the interestof all investors and reflects the fundamental
purposeofmarkets:theefficientallocationofcapitalbetweenissuersandinvestorsasa
centralforcedrivingtheCanadianeconomy
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Inourview,competitionisthebestwaytofosterefficiencyandinnovation,therebyenhancingconfidenceinCanadascapitalmarkets.Forcompetitiontobeeffective,however,itshouldnotbebasedonthemodelsandprinciplesthatcharacterizecurrentmarketplaces.Moreofthesamewillnotaddresstheissuesthatexistintodaysmarketsit
willonlyleadtoadditionalimbalance,costsandinefficiencies.
Aequitasbelievesthereisuntappedopportunitytoleveragetechnologyandcompetitionwhilepromotingliquidity,fairness,costsavingsandmostimportantlyinvestorconfidence.
ThisdocumentintroducesAequitasanditsvaluepropositionsatahigh-level,andalsoprovidesamoredetailedviewofthekeymarketstructuresolutionsthatwehaveidentifiedtofulfillourmission.Overtimeandafterdiscussionswithinvestor,issueranddealerrepresentatives,otherinnovativesolutionsandfurtherdetailswillbesharedleadingtoanintegratedvaluepropositionthatwillbepublishedforcommentinAequitasformal
applicationforrecognitionasanexchange.
c) AchievingTheMissionWithinthecontextoftodaysmarkets,weofferauniquelydifferentiatedandinnovativevisionofhowamarketplaceshouldfunctionandwhomitshouldserve.Specifically,Aequitasproposes:
Anownershipandgovernancestructurebuiltwiththecorefoundingprincipleofservicinginvestorsandissuers;
Advisorycommitteesthatgiveinvestorsandissuersastrongvoice; Solutionsdesignedtopromotefairnessandencourageinvestorconfidencein
Canadasequitymarkets,whileprovidingissuerswithacapitalformationtoolsetthatwillsupporttheirsuccessandgrowth;
Technologythatfacilitatesmarketqualitybyhelpingeliminatethemostprevalentpredatorytradingstrategies;
Aplantopromotesustainablemarketmakingwhichwillsupporttheliquidityneedsofinvestorsandissuers;and
Innovativeandaffordableservicespositionedtoplacemeaningfulcompetitivepressureonincumbentplayers.
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2.TheAequitasStrategya) InnovationtoAddressChallenges
AequitashasdevelopednewapproachesdesignedtobringmeaningfulcompetitionandchoicetoCanadianmarketplaceparticipants.Aequitaswillofferahighlydifferentiatedalternativetothedominantmarketstructuremodelthatwillcatertotheneedsoftraditionalinvestorsandissuers,protectagainstpredatoryandopportunistictradingstrategies,andenhancethecapitalformationprocess.Ourapproachwillinclude:
Newmarketstructuresolutions; Aplantofostersustainablemarketmaking; BestinclassSmartOrderRouting(SOR)services; Aplantoaddressthecostissuesofmarketplaceusers;and Capitalformationenablingsolutionsintunewithissuersandinvestors.b) AnewApproachtoMarketStructure
TheAequitasmarketstructureapproachseekstoapplyinnovationtoaddressintereststhatarenotcurrentlybeingservedandmarketconfidenceissues.Untilrecently,manypeoplebelievedthattechnologywouldonlymakemarketsmoreefficient.Now,withthebenefitoftimeandexperience,theyunderstandthatnotallchangeshavebeenpositive.
SomeobserverspositionHFTsasspecialistsinliquidityprovisionineffect,today's
marketmakers.However,despiteadvantageoustechnologicalaccessandfinancialsubsidies,theseplayershave(incontrasttodesignatedmarketmakers)noobligationtothemarket.Oftentheycompeteforthesameliquidityasinvestors.
Webelievetoday'smarketsfallshortofthepublicsexpectationthatourindustryoughttousetechnologyandcompetitiontoimprovemarkets.Rather,someuseittoextractanunconstrainedtollfrominvestors,largeandsmall.Thesetrendsalsodiscouragetruemarketmakersfromprovidingliquidityparticularlyinsmallcapnameswhereitismostneeded.
Aequitasproposessolutionstotheseglobalmarketchallengesthatwillbringchoiceto
groupsofmarketparticipantswhoaredisadvantagedinthecurrentenvironment.Webelievethesemeasuresarecriticaltorestorebalanceandwillpromotepricediscovery,liquidity,competition,innovationandmarketintegrity.
Aequitasproposedmarketstructurecombinesmultipleorderbooks,innovativeapproachestomatchingprioritiesandmarketmaking,aswellasthepreventionofinappropriatetradingstrategiesasthefoundationofaneco-systemthat:
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Recognizestheroleofhealthymarketmakingwithbenefitsandresponsibilities; Discouragesstrategiesthataredamagingtoprinciplesoffairnessandmarket
confidence;and
Offersaviablealternativetorebateincentivesandmaker-takerpricingwhichAequitasbelieveshasnegativelyimpactedmarketquality.
Thefollowingdiagramillustratesthehigh-levelmarketplacedesignoftheAequitaseco-system:
Diagram1:TheAequitasbasicMarketStructureEco-system
Thefoundationofourproposedmarketstructuresolutionistheestablishmentofthreecoreorderbooks:Dark,HybridandLit.EachisdesignedtoserveaseparateyetintegratedroleintheAequitaseco-system.IntegratingtheseorderbookswithothermarketplacesisaSORsolutionthatwediscussinmoredetailinSection2(d).
Next,wewillbrieflydescribetheproposedstructureandobjectivesofeachofthethreecoreorderbooks.
I. AequitasDarkSimilartoexistingdarkpoolsoperatinginCanadatoday,AequitasDarkwouldoffernopre-tradetransparency.ConsistentwithCanadasdarkrules,matchingwouldoccuratmid-point,oratleastonestandardpriceincrementfromtheNationalBestBidandOffer(NBBO),atregularpriceincrements,orattheNBBOforactiveordersprovidedtheyareforatleast50standardtradingunitsor$100,000invalue.
Activelyremovingliquiditywillonlybeavailabletoretailandqualifyinginstitutionalparties.Theobjectiveofthisrestrictionistopreventpredatorytradingstrategiesand
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encouragequalityrestingliquidity.Toimplementthislimitation,theDarkBookwillrestrictShort-MarkingExempt(SME)participants2fromtakingliquidity.
TherearenoproposedrestrictionsonwhomaypostliquidityinAequitasDark.
Furthermore,partiespostinginthedarkbookwillhavetheoptionto:
Specifyminimumquantitiesoncounterpartysizeandfillsize; Interactonlywithactiveretailorders3; Interactwithcontrarestingliquidity;and Offeradditionalliquidity(sizeup)intheeventofapassive-passivematch.4
Theproposedmatchingpriorityisasfollows:
1. Price2. Broker3. MarketMakerforthesecurity54. WeightedSize/Time6
Theweightedsize/timematchingprioritizationmodelanswersimplicitfairnessissuesassociatedwithtime-dominantmatchingmechanisms.Aequitasbelievesthissystemwillbemoreequitable,fosterlargerandmorereliablerestingorderswhile,atthesametime,deflectingpredatoryliquidityprovisionstrategies.
TheAequitasDarkfeemodelwillnotbeamaker-takerfeemodel.
AequitasDarkhasbeendevisedtoencouragenaturalpassiveliquidityandmarketmakingwhilerestrictingSMEparticipantsfromtakingliquidityinapredatoryfashion.Itsproposedsize-upfunctionalityisbeingofferedtoallowinstitutionalparticipantstoleveragedarkalgorithmicstrategiestomarshalliquidityresidingintheirblotteroronanothermarketwiththegoalofcontributingtosizediscoveryconsistentwithanappropriaterolefordarkbooks.
II. AequitasHybridTheAequitasHybridbook7issonamedasitsharescertainpropertiesofbothlitanddarkbooks.ItwouldonlydisplayliquidityandpermittradingtooccuratorwithintheNBBOat
2 Generallyarbitrageaccounts,an account ofa personwithMarketplaceTradingObligations (MarketMaker), ora fully automated
accountthatholdsnominalpositionsattheendofeachtradingday(seeIIROCUMIR1.1forfulldefinition).
3 Furtherconsiderationwillbegivenintorefiningthedefinitionstoaddressanyissuesregardingcompliance.4Aequitashasfiledapatentforitssize-upfunctionality.5 WediscusstherationaleforthispriorityfunctionalityfurtherinSection2(c).6 AequitashasfiledapatentforitsWeightedSize/Timematchingprioiritizationmodel.7 AequitashasfiledapatentforitsHybridBook.
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regularpriceincrements.Further,itwouldonlydisplayaggregatedliquidity(numberofshares)availableateachpricelevelwithnoindividualrestingorderinformation.
AequitasHybridwouldrestrictSMEparticipantsfromremovingliquidity.Therationale
hereisthesameasinAequitasDark:tosuppresspredatorytradingpracticesandpromotequalityrestingliquidityinthiscasevisibleliquidity.Allparticipantswillbefreetopostliquiditynotably,withtheconfidencethattheyareprotectedfromaforementionedpractices.
Theproposedmatchingpriorityisasfollows:
1. Price2. Broker3. MarketMakerforthesecurity84. WeightedSize/Time9
TheAequitasHybridfeemodelwillnotbeamaker-takerfeemodel.
III. AequitasLit TheAequitasLitbookisamoretraditionallitbookwithoutanyparticipantrestrictions.Itwillofferthedominantmaker-takerpricingmechanismemployedbymanylitmarketplaces.
Theproposedmatchingpriorityisasfollows:
1. Price2. Broker3. Non-SME4. Time
WhileAequitasisoftheopinionthatthemaker-takerfeemodelhasgenerallybeendetrimentaltomarketquality,weintendtooffersuchabookinordertocompetewiththecurrentdominantbookmodelsofferedinthemarketplace.ItisourintenttobenchmarkourlittakefeesgenerallytothetakefeesintheCanadianmarketplace.10OurcommitmentistolowerourfeesintandemwithanyreductionintakefeesinCanada.
Aequitasintendstoofferprioritytorestingnon-SMEordersbothwithinindividualbrokerpriorityandingeneralinitsorderbook.Theintenthereistoensurethatordersfromnaturalinvestorsenjoyhighpriorityinobtainingfillsforrestingorders,andtorestrictpredatoryliquidityprovisionstrategies.Otherthantheabove,restingtimeprioritywillbefeaturedinthisorderbook.
8 WediscusstherationaleforthispriorityfunctionalityfurtherinSection2(c).9AequitashasfiledapatentforitsWeightedSize/Timematchingprioiritizationmodel.
10CurrentlyTSXcharges35milstotakeforhighpricedsecurities.
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PerhapsthemostimportantfunctionofAequitasLitwillbetoserveasthevenueformarketmakerstomeettheliquiditydisplayobligationsassociatedwiththeirrole.Wediscussthegeneralphilosophyandrationaleofourmarketmakerprograminthefollowingsection.
c) SustainableMarketMakingAequitasintendstoofferamarketmakingprogramforbothAequitaslistedsecuritiesandsecuritieslistedonotherexchanges.Therewillbeperformanceobligations(spread,depthandpresence)forsecuritiesofresponsibility.ResponsibilitieswouldbemetviatheAequitasLitbook.
AequitaswouldrequiremarketmakerstobeIIROCmemberswhoaremembersoftheAequitasExchange.WealsoproposeallowingDirectExecutionAccess(DEA)clientstoactasmarketmakersprovidedtheirSponsoringDealeragreestobeaccountablefortheir
actions.Webelievethiswillfosterliquidityinagreaternumberoflistingsandencouragenon-CanadiandomiciledHFTstoparticipateastruemarketmakersandaddvaluetoourmarket.
Forsecuritiesofresponsibility,priorityintheAequitasDarkandHybridbookswouldbetheprimaryincentiveofferedtomarketmakers.Aequitasbelievesgrantingpriorityinthesebookswillbeavaluedfunctionalbenefitformarketmakers;and,importantly,onethatdoesnotrelyonafinancialsubsidybasedonthemaker-takerfeemodel.
Importantly,asourSORwillbegearedtowardscombatingbookfade,itwillbethephilosophyofAequitastoestablishmarketmakingobligationsthatarerealisticand
consistentwithachievinglargeraveragetradesizes.Thisisimportant,asourSORwillconstantlystrivetoholdourmarketmakerstothequotesthattheydisplay.
d) BestinClassSORServicestoEmpowerInvestorsWithpartieslookingtocapitalizeonthesystemicweaknessesintodaysmarketeco-system,itisourviewthatinvestorsandmarketqualityhavesuffered.Accordingly,investorsanddealersrequirenewtoolstohelpthemcopewiththeserealities.
AequitasintendstoofferabestinclassSORservice11designedtohelpparticipantsaccessliquidityacrossvarioustradingvenueswhileavoidingtheorderbookfadesocommonin
todaysmarkets.TheAequitasSORofferingwillplaceapowerfultoolwithinreachofallinvestorsanddealers.
e) AddressingtheCostIssuesNotwithstandingourconcernsabouttheimpactofmaker-takerpricingintodaysequitymarkets,Aequitasrecognizesthecurrentdominanceofthismodel.Assuch,wehave
11ThemodelunderlyingtheAequitasSORispatented.
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concentratedoureffortsondivisingaunifiedeco-systemthatemphasizesinvestor-focusedfunctionality,sustainablemarketmakingandcostefficiency.
WhilepricingfortheAequitasDarkandHybridbookshasyettobefinalized,ourgeneral
intentistoofferalowtake-takefeemodelacrossbothofthesebooks.Further,inordertofostercriticallyimportantretailorderflow,Aequitasintendstoofferdiscountsonactivefeesforretailtradingnetworks.Thispricingapproachwillprovidesubstantialsavingsforbothretailandtraditionalinstitutionalinvestors.
TheAequitasLitbook,inrecognitionoftheclearrolemaker-takercontinuestoplayinourmarketplace,willofferfeescommensuratewiththoseofCanadasothermake-takemarketplaces.Thatsaid,Aequitasbelievesthatitssuiteofofferingsandeco-systemwillapplymaterialcompetitivepressureonthemake-takemodelingeneralwhichitbelieveswillmoderateindustrydependenceonthispricingschemeovertime.
Aequitaswillalsoproposeahighlycompetitivefeemodelforitslistingsofferingaswellasanewmarketdataoffering12thatitanticipateswillprovideenhancedvalueincomparisontoanycurrentsinglemarketplacesdataofferingatconsiderablecostsavings.
f) ACapitalFormationProcessinTunewithIssuersandInvestorsEarlyandmid-stagecompaniesseekingcapitalfinditincreasinglydifficulttoobtainfundingfromthetraditionalsourcesofcapitalraising:venturecapitalandthepublicmarkets.Partofthisdifficultystemsfromthefactthatthecostandoverallburdenofbecomingapubliccompanybecameveryhigh.Furthermoregoingtothepublicmarketsisonlyasuccessfulstrategyforthosecompaniesthatcandemonstratetangibleprogressand
growthtosupportliquidity.
Tofacilitatethesecompaniesaccesstocapital,Aequitaswillintroduceacentralizedmarketplaceforexemptsecurities(ESM)13focusedonearlyandmid-stagecompanies.TheESMwillnotonlyallowthesecompaniestoraisecapitalfromaccreditedinvestorsandotherpermittedparticipants,butitwillalsoallowthemtobenefitfromsecondarytradingtoprovidetheirinvestorswithliquidity.TheESMwillalsorepresentanewbusinessopportunityforthedealercommunityintheCanadianmarket,asaccesswilltakeplacethroughregistereddealers.
12 Aequitashasfiledapatentforitsnewmarketdataoffering.
13AequitashasfiledapatentforitsESMmarketplace.
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3.CanadianMarketplaces,theNeedforImprovementa) InvestorsandMarketMakers,insearchofabalancedPlayingField
ThecurrentdominantmarketstructuremodelforCanadasmarketplacesattractsandprefersHFTsovertraditionalinvestorsandtruemarketmakers.Thisevolution,whichisnotlimitedtoCanadabutisglobalinnature,occurredbasedupontheprevailingviewthatthesetraditionalplayersarecaptiveclienteleofthemarketplaces.14
SomejustifythepresenceofHFTsasnecessarytofosterliquidityanddownplayanyadvantagebestowedonHFTs,arguingthatpreferentialaccessisequallyavailabletoallandthatfeesareunbiasedandtransparent.
Whiletheseargumentsaretechnicallytruetheyoverlooksomeimportantrealities:
Thetoolsofferedbymarketplacesareuniquelyusefultoavoidinvestingrathertheyareroutinelyleveragedtosidesteptheaccumulationofanymeaningfulposition;
Thesametoolscanalsobeusedtoreadandanticipateinvestordemandinthemarketplaceinrealtimeallowinglowriskprofiteeringfromveryshort-termmovesagain,atthecostofnaturalinvestors;
Bynatureinvestorsareliquiditytakers;thereforeheldhostagetoseekoutliquidityacrossmultipleandconstantlychangingmarketeco-systems-inthisenvironmenttheslightestmis-stepcauseslostliquidityandhighercoststoinvestors;and
Thecosttomaintaintheseeco-systemsfallssquarelyoninvestorsandthenetworksthatsupportthemcomingintheformoffeestotakeliquidity,highandbiasedfeestructuresformarketdataandgenerallybeingforcedintoatechnologyspendingarmsracewithnochoiceandquestionablebenefits.
Ingeneral,theaboveevolutionhasfavoredopportunisticandpredatoryprofitingbynon-investorintermediaries,whiletraditionalinvestorsincreasinglyseethemarketsasstackedagainstthemandformalmarketmakingbecomesunsustainable.
Notsurprisingly,investorsareaccountingforlesstradingvolumesandformalmarketmakersaredwindling.Diagram2showsIIROC'sHOTStudyresultsforvolumebreakdownforthedataitreviewedaspartofitsstudy.
14 InAequitasopinion,theOrderProtectionRuleandsimilarregulationsinothercountrieshaveenabledtheexpansionofHFTactivity
and,asanunintendedconsequence,ofpredatoryandopportunistictradingstrategies.
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Diagram2:VolumeBreakdowninCanadianmarkets(IIROCHOTStudy2012)15
Asaresult,marketqualityischallenged:
Displayedspreadsarenolongerthespreadsatwhichmostmarketparticipantstrade.Whiledisplayedspreadshavenarrowed,theeffectivespreadsatwhichtraditionalinvestorstradehavebeenincreasinglysubjectedtovolatileintradaypricemoves(seeDiagram3-PartC);
Thedisplayedpictureofliquiditysupplyisnolongerreliablefortraditionalinvestorslookingtotransactinsizesbeyondasingleboardlot(seeDiagram4);
Overwhelmingamountsofmarketdataofdecliningmarginalvaluehasleadtoalackofconfidenceindisplayedquotesandincreasedcostsforparticipantstoprocessitinparticular,forthosemaintainingnetworkssupportinglong-terminvestors;
Smallandmid-capsecuritiesareinadownwardliquidityspiralasdesignatedmarketmakershavebeencrowdedoutofthemarkets.
15IIROCHOTStudy2012:http://www.iiroc.ca/Documents/2012/2fb137e3-4371-43bd-b567-59b789a1e4d7_en.pdf
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Diagram3:Volumes,SpreadsandIntradayVolatilityinCanadianMarkets
(EvolutionofCanadianEquityMarkets,RBC,February2013)
Diagram4:PercentageofFleetingOrdersinCanadianlitMarkets
(CanadianOrderFlowTrends,ITG,April2013)
Ithasbeennotedbymanypunditsthatintradaytradingactivityhasmadetradingmorechallengingforinstitutionalinvestors.
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Turbevillestates:
Bid/AskspreadsmaynotwidenwithHFTactivity,butpricelevelsarealteredtothe
detrimentoflargeinstitutionalinvestorsthattransactlargepositions.HFTseliminateall
meaningfuldepthofinterestforashortperiodoftime.16
AequitasbelievesthattodaysmarketstructurealsohasanequallyimportantimpactonretailinvestorssomethingwehighlightinDiagram5.
Diagram5:ShiftinIntradayTradingRanges
(RBCMarketStructureConference,April2013)
Thediagramaboveshowsaclearandpermanentshiftinshort-termpricevolatilitythathasbeenmostdramaticduringtheearlymorningsession,therebysuggestingademonstrableimpacttoretailtradingactivity,whichtendstotradeparticularlyheavilyduringthistimeperiod17.
SimilardevelopmentshavebeenobservedinothermarketssuchastheU.S.andEurope,andareemergingacrossotherregionsintheworld.
Curbingthesetrendsistheresponsibilityofallmarketstakeholders,andAequitasbelieves
thatsustainablesolutionswillonlyresultfromdifferentiatedcompetitivemarketplaceofferings18.
16 WallaceC.Turbeville,CracksinthePipelinePartTwo:HighFrequencyTrading (March8,2013)
17 RBCestimatesthatabout60%ofitsretailorderflowtradesmostdayspriorto11AM.
18 Weshouldnotandcannotexpectallmarketstructureissuestobeaddressedonlybytheregulators.Differentiatedcommercialsolutions,
withcloseoversightbytheregulators,areneededtobeabletoaddressdifferentinterestsandacontinuouslyevolvingenvironment.
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b) PublicListings,ontheDeclineTheinvestorconfidenceproblemisafrequentlydiscussedtopiclargelyrecognizedbyCapitalMarketsstakeholdersglobally.WearehoweveralsofacinganIPOchallenge.
AsdemonstratedinDiagram6,lessandlesscompaniesareinterestedingoingpublic.
Diagram6:GoingPublicLaunchofSmallIPOs
(LetterfromthePresident,vol.58,IIAC,February2013)
Thereareseveralreasonsforthis:
Manypublicallylistedsecuritiesshowlimitedaccessibleliquidity,impactingtheircostofcapitalforanyfutureroundsoffinancing;
Thepathofpubliclistingispromotedtocorporationsthatarenotprepared:notpreparedfortheregulatory,managerialandfinancialburdenthatcomeswithapubliclisting,notpreparedtoattractinvestorinteresttofueltheirliquidityandnotpreparedtounderstandtheresponsibilitiesofgoingpublic;
Truemarketmakers,committedtoliquidityobligationsandcriticaltonewlistings,aredwindlingandthereforethereislessandlessliquiditysupportavailablefornewlylistedcompanies;and
Initiativestotackletheharmthatiscausedtoissuersbyexacerbatedintra-daypricevolatility,liquidityerosionorhamperedbuy-backoperations,arescarce.
Forpubliclylistedcompanies,Aequitasbelievesitiscriticaltore-establishapartnershipbetweentheexchange,theissuerandtruemarketmakers.Forcorporationsthatarenot
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readyforapubliclisting,butneedaccesstocapitalandliquidity,Aequitasbelievesthereisaneedtoprovidedifferentinnovativealternatives.
c) CapitalFormationforSmallandMid-SizeCorporations,aStruggleSmall-andmid-sizehigh-growthcorporationsarethefoundationforfutureeconomicgrowthandemployment.
InCanadathesecorporationsarefindingitincreasinglydifficulttoaccessthefinancingtheyrequiretofuelthisgrowth(seeDiagram7).IPOsareoftennolongeraneffectivesolutionandmanyrapidlyfallbackonM&AexitsorforeignsolutionsthatthwarttheirCanadianambitionsandpotential.
Diagram7:LimitedAccesstoMarketsSmallEquityFinancing
(LetterfromthePresident,vol.58,IIAC,February2013)
Aequitasdoesnotbelievethattheproblemisalackofpotentialcapitalprovidersorthelackofpromisingissuers.Thechallengeistoallowsmallerissuerstointeractwithrisktolerantinvestorsinawaythatsupports,withtherightscaleandtimeliness,liquidity.Aequitasbelievesthatlocalangelinvestornetworkshaveshownushowthiscanwork.Weintendtolearnfromthemandamplifytheirmodelonanationwidelevel.
d) Dealers,asustainabilityChallengeThesuccessoftheprimarystakeholdersofamarketplace,issuersandinvestors,alsolargelydependsonthequalityofservicetheyobtainfromdealers.
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Thequalityofdealerserviceistheresultofchoice,competitionandinnovation,justasitiswithmarketplaces.Hereanotherissueemerges:theCanadiandealercommunity,andinparticularthesmallboutiquefirms,areunderthreat.
Diagram8showstheevolutionofoperatingprofitamongstdifferentcategoriesofdealers.
Diagram8:OperatingProfitIntegratedvs.InstitutionalandretailBoutiques
(LetterfromthePresident,vol.59,IIAC,March2013)
Attheendoflastyear,closeto50%oftheCanadianboutiquedealerswerelosingmoneyandweexpecttoseeanincreasingnumberofcasualtiesresultingfromthistroublingtrend.
Thisisaconsequenceofdecliningvolumesandincreasingoperatingexpenditure.Whilethelatterisaconsequenceofmultipefactors,Aequitasbelievesthatthedominantmarketstructuremodel,whichtaxesthesmalldealersinvariousways,isanimportantpartoftheissue.Thelackofresponsivenessofmarketplacestoalleviatethedealerscostburdensbypromotingnewmarketstructuremodelsandreasonablemarketdatapricingneedstobeaddressed.
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4.NextStepsThenextstepsforAequitascanbesummarizedinonewordDialogue:
Dialoguewithinvestorsandissuerstoobtainfurtherinsightsandensurethatoursolutionstrulyaddresstheirissuesandchallenges;
Dialoguewithdealers,inparticularthesmallerandmid-sizefirms,toensurethatoursolutionswillprovidethemwiththerelieftheyneed;
DialoguewithregulatorstoexplainoursolutionsandthebenefitofenablingcommercialsolutionsthatwillensuremorebalancedandefficientCanadianCapitalMarketsthatultimatelywillleadtoastrongereconomy.
Aequitas'proposaltooperateanexchangeissubjecttoregulatoryreviewand,inthatsamespiritofdialogue,wehavecommenceddiscussionswithapplicableregulatorsinadvanceof
thefilingofaformalapplicationforrecognitionasanexchange.Aequitasplanstofiletheformalapplicationtowardstheendof2013.
Thispaperisnotasubstitutefortheregulatoryprocessthroughwhichtheformalapplication,whichwillincludespecificdetailsoftheproposal,wouldbefiledbyAequitasandpublishedforcomment.Aequitaswillbeprovidingadditionaldetailregardingitsproposalaspartofthatprocess.
Ourmandateistoimprovemarketquality,promotefairnessandfostereconomicgrowthwith
allstakeholdersinmind.Toallowustosuccesfullyexecutethisplan,stakeholderinputis
critical.Welookforwardtoyourinput.
Weareatacrossroadsforourmarkets:Makeyourvoiceheard.