Big names back fledgling exchange

TORONTO — Taking on the multi-million-dollar TMX Group Inc. will be no easy task.

A proposed new stock exchange dubbed Aequitas Innovations Inc. has some of the key players that took a bite out of the market share of Canada’s main trading exchanges a few years ago: namely Royal Bank of Canada and Jos Schmitt, the man who championed bankbacked Alpha Group, which captured nearly 20 per cent of volume traded in Canada within three years of its 2008 launch.

But Aequitas also faces a more formidable competitor.

Thanks to a three-step acquisition process led by a consortium of many of Canada’s largest banks and pension funds last year under the Maple Group banner, TMX Group now boasts a tripleplay: trading, listing and clearing and settlement of trades.

It’s worth noting that Greg Mills, the Royal Bank’s co-head of global equity trading who is now championing Aequitas, wrote a letter to the Ontario Securities Commission last year raising “some concerns” about the effects of the takeover of TMX on Canada’s capital markets. Royal Bank, one of the owners of alternative trading venue Alpha, was squeezed out when the latter was rolled into TMX Group. Schmitt, the former chief executive of Alpha and newly crowned CEO of Aequitas, was also out of Alpha after the TMX takeover.

The barriers to entry for the first two elements of the TMX juggernaut — trading and listing — are not particularly high, but clearing and settlement is a different story. Getting into the post-trade business is capitalintensive, heavy on both regulation and technology.

This was a point raised frequently during the Competition Bureau’s review of the Maple/TMX transactions, and is now among the challenges for this new group.

The company listings business is another part of Canada’s capital markets landscape in which there have been few winners aside from the mighty Toronto Stock Exchange and its smaller sister exchange operations in Montreal, Vancouver and Calgary.

The listing strength of Alpha, the trading venue launched by Canada’s big banks in 2008 to take on the TMX, was never tested; Alpha did not win regulatory approval as an exchange that would list companies until it was in the midst of being swallowed up by Maple as part of the takeover of TMX Group.

What is clearly different about Aequitas, which plans to apply to regulators for recognition as an exchange by the end of this year, is the heft and reputation of its backers. These include Royal Bank, Barclays Corp. Ltd., CI Investments Inc., Investors Group and Mackenzie Financial, as well as PSP Public Markets Inc., part of the Public Sector Pension Investment Board. These banks and money managers are active traders that could bring serious volume to the new stock exchange.