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TMX Broadcast Centre manager Kris Backus walks in front of the centre's display board in Toronto on Monday May 16, 2011. Effective June 1, TMX Group plans to rejig its so-called “maker-taker” model that will affect trading on the Toronto Stock Exchange, the TMX Venture Exchange and the TSX Alpha Exchange.Frank Gunn/The Canadian Press

TMX Group Ltd. is following the advice of the securities regulator and proposing changes to its stock-trading fee model that will see costs come down for active traders and raise the cost of doing business for high-frequency traders.

Effective June 1, TMX Group plans to rejig its so-called "maker-taker" model that will affect trading on the Toronto Stock Exchange, the TMX Venture Exchange and the TSX Alpha Exchange.

Under the maker-taker model, passive traders such as high-frequency traders receive a rebate for trading a stock and active investors who take the other side of the trade pay a fee. The TMX makes money by pocketing the difference, which is a fraction of a penny per stock. Under the proposed changes, which are subject to regulatory approval, taker fees will come down by an average of 26 per cent while maker rebates will be reduced by 31 per cent.

The exchange's changes mirror what the regulator had proposed last year. In May, 2014, the Ontario Securities Commission (OSC) put out a proposal that suggested a cap on fees to trade a stock priced above $1 of $0.003 a share.

TMX is "really just getting ahead of something that the regulators are proposing," Doug Clark, managing director of research with ITG Canada Corp., said in a telephone interview.

"The TMX Group's average spread increases ever so slightly so they're actually going to make more money per trade,"

The maker-taker model has been around for about a decade in Canada but has existed in the U.S. since the late 1990s.

"It's a very controversial fee model," Kevan Cowan, president of TSX markets with TMX Group, said in a telephone interview.

The biggest knock against the maker-taker model is that critics believe it punishes traditional investors who pay to trade, while it incentivizes high-frequency traders who get paid to trade. High-frequency trading has come under fire in recent years, partly as a result of the publication of Michael Lewis's Flash Boys, which largely demonized the practice.

"Most people on the Street are in favour of lower maker and taker fees, particularly the dealers on the buy side who tend to be takers more often than makers," Mr. Clark said. He said changes in maker-taker fees are "something that's going to harm the high frequency traders."

Apart from pressure from the regulator, Mr. Cowan said the TMX was also facing pressure from traditional traders to lower fees and needed to make changes in light of increased competition domestically and internationally.

The competitive landscape for TMX Group has intensified in recent months. In late March, the Aequitas NEO Exchange launched. It is owned by a bevy of heavy hitters including CI Investments Inc., RBC Dominion Securities Inc., ITG Canada Corp. and OMERS Capital Markets and is seen as a credible challenger to TMX Group, which is the market leader.

Last week, CIBC analyst Paul Holden noted that it is far too early to judge the success of Aequitas but with about 3-per-cent market share in cash equity volumes, its impact on TMX Group's revenue so far is "negligible."

"There is a lot of competition in the market," said Mr. Cowan, who pointed out that the company is facing competition from not only Aequitas in Canada but other alternative exchanges such as Chi-X and U.S. exchanges that trade the 200 stocks that are interlisted.

Editor's note: A story published in Wednesday's Report on Business incorrectly defined the maker-taker model. In fact, "passive" traders are the "makers" of liquidity and "active" traders are the "takers." Also, in reference to comments by ITG Canada Corp.'s Doug Clark, the article omitted to identify Mr. Clark's employer as an investor in Aequitas Inc., a TMX Inc. competitor.

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TMX Group Ltd
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