A ruling Tuesday by the Ontario Securities Commission is expected to add fuel to already-heated arguments over whether all stock exchanges with market "speed bumps" should be treated the same by regulators.
These speed bumps, made popular in Canada by a new stock exchange run by Aequitas Innovations Inc., are designed to create a level playing field with high frequency traders (HFTs). By slowing down high-speed trades, speed bumps purportedly eliminate any advantage such traders would have over average traders.
The issue is back in the spotlight after the Ontario Securities Commission on Tuesday gave TMX Group Ltd. its blessing to implement changes to the structure of its Alpha exchange, including a speed bump. In its ruling, however, the OSC stipulated that under existing regulations, Alpha can't be considered a "protected market."
Until now, all Canadian exchanges have been protected, which means their stock quotes must be used to determine the best price for a trade. Because multiple trading venues now exist, the best quote for Royal Bank of Canada shares, for instance, may be found on Chi-X instead of the Toronto Stock Exchange. To ensure market participants get the best quoted price, dealers must hook up to all the trading venues – for which the venues charge a fee.
But now that Alpha won't be protected, dealers aren't required to connect to it.
The big question now is what this means for Aequitas, whose exchange was deemed by the OSC to be protected when it was approved (though the commission acknowledged the ongoing debate around protected exchange rules and high-frequency trading). The OSC indicated that Alpha was treated differently because, unlike the Aequitas exchange's speed bump, which only applies to certain traders likely to be HFTs, Alpha's speed bump is applied to all traders. However, the Alpha ruling notes "the Commission, as well as the Canadian Securities Administrators (CSA), is currently examining the application of [protected orders] more broadly with respect to any marketplace which imposes an order processing delay, and we expect to issue a proposal for comment in the near term."
The OSC declined to elaborate on its ruling. But observers expect it to propose making the rules more consistent, which is something TMX advocates.
"Any other marketplace that has features similar to [Alpha] should also be unprotected," Kevan Cowan, the company's equities head, said in an interview.
If dealers aren't required to hook up to Aequitas' exchange, its ability to compete with its rivals could be hindered.
Upon hearing the news about the regulators' wider review, Aequitas argued that its offering differs from Alpha's, and therefore deserves different treatment.
"The innovation and trading value in our NEO book, one of our trading books and the one where we apply a speed bump to HFTs, is not related to being a protected market or not. Its merit is based on the value it creates for long-term investors who direct their orders to it," Aequitas CEO Jos Schmitt wrote in an email.