Comstock
Regulators have a lot of questions about a plan by a group of Canadian market users to launch a new stock exchange, and the people behind the proposed Aequitas exchange say they have the answers.
After the Ontario Securities Commission on Tuesday released a request for comment that laid out some concerns, chiefly that the Aequitas plan did not conform with some parts of the key regulatory framework around fair market access, Aequitas released its answers. (You can read the original Streetwise post laying out some of the main concerns here.)
The goal of Aequitas is to create a market that inhibits what its backers view as unfair strategies by high frequency traders. But some of the new ideas built into the market structure to do that have clearly raised issues for the OSC. The new market's proponents acknowledge that, but contend in their answers that regulators need to be flexible with new innovations designed to improve the market's quality.
A lot of the concern centres on the Aequitas plan for a "hybrid book" that would combine attributes of traditional markets and of "dark pools" where bid and ask prices are not publicly displayed. The hybrid book would also restrict access, keeping short-term traders out in some instances.
The OSC flagged the issue that some investors would not be able to potentially access the best prices for stocks, running afoul of a regulatory principle that says all investors should have fair access to the best displayed price.
Aequitas acknowledged that it does not fit the rules, but said it respects the "spirit" of regulations.
"The Aequitas hybrid book is an innovative trading solution that prohibits predatory trading activities and promotes quality resting liquidity [limit orders], while respecting the spirit of existing regulations. The fact that it is innovative and does not fit an existing rule set should not preclude market participants from benefiting from it."
Aequitas argues that the fair access principle is "not absolute but has a test of reasonableness," and that "limiting access should not be considered unreasonable when it supports market quality and addresses harm in the marketplace."
That's a sampling. The full Aequitas rejoinder to the OSC is available here.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)
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