08/14/2013 12:48 EDT | Updated 10/14/2013 05:12 EDT

Aequitas stock exchange should get green light, meets 'spirit' of OSC rules

TORONTO - A new Canadian stock market proposed by the country's largest bank and several financial firms says it should be permitted to go ahead, because although it may not comply with existing securities rules, it abides by the "spirit" behind them.

In response to concerns raised by the Ontario Securities Commission, the backers of Aequitas Innovations Inc., said the OSC should be open to innovation if it wants to foster a better competitive marketplace.

In a three-page summary which lays out its goals, the group behind Aequitas said there is room for another market in Canada's exchange business.

"We believe differentiated marketplace competition will enhance confidence in Canada's capital markets. More of the same won't address the issues that exist," the group said.

"We see untapped opportunity to use innovative technology and marketplace design in a way that promotes liquidity, fairness, cost savings and economic growth."

In June, Royal Bank (TSX:RY), BCE Inc. (TSX:BCE), Canadian pension fund PSP Investments, and a number of Canadian and international brokerages announced plans to set up Aequitas, as a rival to the Toronto Stock Exchange and other markets owned by the TMX Group (TSX:X). If approved, the exchange could be up and running by late 2014, at the earliest.

On Tuesday, the OSC raised several issues with the proposal, including how the exchange wants to go about curbing unfair strategies used by high-frequency traders.

Aequitas proposes to create a "hybrid book" so some bid and ask prices are not shown to the public, with access to trades restricted in some cases.

The method would go against the OSC's rules, which say markets must be transparent and offer equal access to trades.

But the group said the framework is aimed at preventing "predatory trading practices," not at preventing unfair access.

"The regulatory fairness standard is not absolute but has a test of reasonableness," it said. "Limiting access should not be considered unreasonable when it supports market quality and addresses harm in the market."

Aequitas said traditional investors are at a disadvantage with current markets that cater to high-volume trading activities to generate revenue.

High frequency trading has been blamed for putting artificial volatility into the markets by using computers to engage in behaviours such as exploratory trading, where small orders are made to see where the big traders will go.

The Ontario Securities Commission has launched a 45-day review of the Aequitas proposal, and has asked the public to submit comment until Sept. 27.