The Aequitas NEO exchange went live on March 27 and is offering Canadian investors trading in a range of its own listings as well as all securities listed on the Toronto Stock Exchange and TSX Venture Exchange.
The week starting April 6 there were 177 securities available for trading, and since then the NEO has traded a total of 18,311,993 shares, with an average trade size of 646 shares, corresponding to a market share of 3% in those securities.
The launch of this new exchange in Canada comes as a response in part to low investor confidence.
“We are focusing on ETFs and peripherally looking at the structured products space, which is an underdeveloped market in Canada, compared with other parts of the world,” said Joacim Wiklander (pictured), chief trading and data officer at Aequitas NEO, adding that attempts to bring structured products on exchange have been unsuccessful in the past, with the exception of exchange-traded funds (ETFs). “Big banks [in Canada] typically have many structured products, but they only distribute them within their own networks as opposed to bringing them on exchange.”
The Aequitas NEO listing manual, which covers listing activity on the exchange and is applicable to all companies listing with NEO, explains the minimum listing standards for general issuers and investment issuers, closed end funds, ETFs and exchange-traded product (ETP) issuers. Applicants must fulfil minimum requirements including minimum distribution and minimum price, as well as demonstrate adequate working capital, capital structure and analyst coverage. Issuers looking to list warrants, preference shares and convertible debentures are subject to supplemental listing rules.
“We are trying to curb what we consider to be predatory high frequency trading (HFT), or predatory trading strategies where firms have asymmetrical access to information,” said Wiklander. “We are very big proponents of electronification and HFT when it is used for the right purposes of market making or liquidity provision arbitrage, but there are types of HFT that we think are detrimental to the long-term investor, such as technological front-running.”
Technological front-running, said Wiklander, is leveraging speed differences to gain advanced access to information to buy and sell stock ahead of others and sell or buy back milliseconds later at no risk and guaranteed profit. “We have innovative solutions on the trading side to curb predatory behaviour,” he said. “We are moving away from strict time priority and introducing size as a factor. If an investor is willing to show size and commit that to the book for a longer period of time, he will have higher priority and higher likelihood of execution.”
A second theme that the launch of the new exchange is aimed to address is the lack of reliable secondary market liquidity in Canada. “The fairness and predatory trading aspect was one of the key ignitors of this initiative, but the unsuccessful IPO market in Canada was another one,” said Wiklander. “There is a liquidity issue here, where companies go public too early and do not have the support that they should have.”
According to Wiklander, in Canada most of the volume is concentrated in 200 to 250 securities out of 4,000 publicly listed companies and ETFs, with some trading very little and some not at all. “Besides the market structure solutions we have speed bumps and different types of matching priorities that we think will eliminate, or at least curb, predatory trading.”
The exchange should be at full capacity in terms of instruments traded by May, according to Wiklander. He added that the next step is to kick off the listings business in the summer.
"As a third component, separate from the NEO Exchange, we also have a private market initiative where we think the right approach for a lot of the small and mid-cap companies is to not go public too early,” said Wiklander. “We are working on a separate initiative where we can let private companies both raise capital as well as trade outside of an exchange environment in a non-continuous fashion.”
Wiklander has extensive electronic trading experience in both the equities and derivatives market. At Aequitas he is responsible for building and managing the public market offerings. Most recently he was the CEO of Neonet Securities, a European agency broker that pioneered smart order routing. Prior to Neonet, he held several different executive positions at the Orc Group, a global provider of electronic trading technology, including chief strategy officer and VP of product management.