Aequitas Innovations Inc. said Tuesday it's in the process of filing for regulatory approval for the exchange by the end of this year. If given the go-ahead, the market could be up and running by late 2014.
Named Aequitas after the Latin word for equality and fairness, the exchange is the brain-child of the Royal Bank of Canada (TSX:RY) and has the support of a number of financial heavyweights including mutual fund operators CI Investments Inc. (TSX:CIX) and IGM Financial Inc. (TSX:IGM), Canadian pension fund PSP Investments , and brokerages ITG and U.K.-based Barclays.
"The exchange business is a highly competitive business and it will be a little bit of a dust-up," said Tom Caldwell, chairman of the investment firm Caldwell Securities.
Caldwell, who also heads the Canadian National Stock Exchange, said Aequitas will have to prove that it can provide value and quality over its main competitor, the TMX Group (TSX:X), which runs several markets including the Toronto Stock Exchange.
"They're probing for weaknesses in the existing system. That's always what a new entrant does," said Caldwell. "The weakness can be a lack of innovation. The weakness can be a high cost structure. They will try to use those things to their advantage."
Aequitas president and chief executive Jos Schmitt said the venture is targeting investors and companies who want to get more bang for their buck.
"The industry is facing a lot of challenges," said Schmitt, a former senior executive at Alpha Group, an exchange that was acquired by the TMX Group.
"Activity is lower than what it used to be. Costs are higher. We really wanted to rebuild confidence in the market, so going forward, the market and the business can grow."
Schmitt said the appetite for a new exchange is strong, with Canada not lacking in its number of high-quality companies to fill it.
Aequitas Innovations said the appeal of Aequitas will be its competitive fee structure for investors and particularly, smaller to mid-sized companies.
In particular, it is promising to promote "true and reliable liquidity" to traditional investors it says are at a disadvantage with current markets that cater to high-volume trading activities to generate revenue.
High-frequency trading (HFT) has been blamed for putting artificial volatility into the markets by using superfast computers to engage in behaviours such as exploratory trading, where small orders are made to see if there is any interest in the stock.
These computers can also engage in high-volume trades, up to 5,000 per minute, in an effort to clog up bandwidth and prevent legitimate trades from happening.
"They can make it complex and more costly for legitimate investors, very definitely," said Caldwell, who estimates HFT accounts for about 25 to 50 per cent of all trades.
"It can undercut legitimate investing, undercut price discovery and it can exacerbate or aggravate market downturns. Trading is becoming very esoteric and complex. The average retail investor is becoming a little bit cynical and I believe rightly so."
Aequitas makes a distinction between "predatory" and other high-frequency trading activities, saying some types impair small-scale retail investors and institutional investors representing pension plans and mutual funds.
The new exchange plan comes at a time when Canada's largest stock exchange operator reported a drop in new listings and trade volumes in its latest quarter.
TMX Group said it had a first-quarter net profit of $37.8 million, or 70 cents per share. Revenues were $172.2 million for the three months ended March 31.
In the same 2012 period, the TMX reported a net loss of $4.4 million, but the results were not comparable because of a change in ownership late last year and the consolidation of various platforms.
The TMX Group was acquired by some of Canada's largest banks, pension funds and other financial services as members of what was known as the Maple Group.
In a statement, the TMX Group said the exchange is poised to compete with any new entrants.
"The Canadian marketplace is certainly a competitive one and the news of a new market entrant is not unexpected," said spokeswoman Carolyn Quick in an email.
"TMX Group is an excellent domestic and international competitor, and we are both prepared and well-positioned to compete effectively."
Wayne Adlam, a professor at the Ivey School of Business at Western University, said that Aequitas will face a number of challenges — including competing with the TMX Group from a finite group of investors.
"Volume has been rather tepid for the last couple of years. If anything, it has been decline, and even they're declining, high frequency trading has been making up a larger portion of it," said Adlam, a former investment banker.
"It's difficult to say to the average investor that there's a need for another major Canadian exchange."
— With files from David Paddon