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Aequitas to use 'speed bump' and high fees to discourage high-frequency trades

TORONTO - Aequitas Exchange, a proposed new Canadian stock market backed by the country's largest bank and several large financial firms, plans to launch four trading books, including one that will include a "speed bump" and large fees to deter high-frequency trading strategies.

In an application to the Ontario Securities Commission, Aequitas Innovations Inc. said its Neo Book will use a random delay and "uneconomic transaction fees" to discourage high-frequency trading, which has long been blamed for putting volatility into the markets as traders use computers to engage in behaviours like exploratory trading, where small orders are made to see where the big traders will go.

The strategies have been criticized for putting traditional investors at a disadvantage in current markets, which cater to high-volume trading to generate revenue.

"The Aequitas Neo Exchange aims to curb predatory trading strategies through tailored and targeted interventions, rather than a one-size-fits-all approach," said the company in a statement Friday.

"The proposed technology and market structure model will enhance market quality by rebalancing the market in favour of long-term investors and others without speed and technological advantages, while continuing to facilitate strategies that add value."

The other three trading books vary in fees and focus on other aspects of trading, including making "dark" orders and intentional cross trades more transparent.

"We are building the exchange of the future using a bold new blueprint that offers a common sense approach to trading and raising capital; that uses technology to empower and unlock rather than discriminate and deceive; and that rewards those who capitalize and invest based on sound strategy rather than those who exploit structural loopholes," said Jos Schmitt, president and chief executive officer at Aequitas Innovations Inc.

Aequitas was proposed by Royal Bank (TSX:RY), BCE Inc. (TSX:BCE), Barclays Corp. Ltd., Canadian pension fund PSP Investments, and a number of Canadian and international brokerages in June 2013 as a rival to the Toronto Stock Exchange and other markets owned by the TMX Group (TSX:X).

The group had initially proposed a "hybrid book'' model, which would have allowed some bid and ask prices not be shown to the public, with access to trades restricted in some cases. But it now says the Neo Book model is the best option because it doesn't raise any fair access concerns, which goes against OSC rules of transparent and equal access markets.

"The Neo Book does not prohibit access for any liquidity takers and, we believe, does not raise any fair access concerns," Aequitas spokeswoman Joanne Kearney said in an email.

"Creating disincentives for certain types of order flow is consistent with the basic principle of fair access in lit markets," she added.

The proposed exchange still needs regulatory approval, which could come as early as the end of this year. The OSC will seek public comment on the Aequitas application for 60 days, until Aug. 26.

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