By Ben Dummett
A new Canadian stock exchange spearheaded by Royal Bank of
Canada has secured investments from U.S. money manager Invesco Ltd.
and one of Canada's biggest pension funds, according to a person
familiar with the matter, a development that ratchets up pressure
on the country's main exchange.
The investments from Invesco and B.C. Investment Management
Corp. give the upstart Canadian exchange a major source of trading
volume and listings to compete with Toronto Stock Exchange operator
TMX Group Ltd., which already is concerned it has been losing
trading activity to U.S. marketplaces.
Invesco oversees $809.4 billion in assets and offers a family of
more than 140 U.S. and international exchange-traded funds. B.C.
Investment Management, with 114 billion Canadian dollars (about $90
billion) in pension assets, also is expected to generate
significant trading activity. The size of the two investments in
the new exchange--called Aequitas NEO Exchange Inc.--couldn't be
learned.
Invesco, Aequitas and B.C. Investment Management each declined
to comment.
More brokers and money-management companies are backing trading
platforms to compete with established stock exchanges as a way of
cutting trading costs and weeding out high-frequency traders. In
January, The Wall Street Journal reported that Fidelity
Investments, the large Boston-based money manager, teamed up with
eight other firms including BlackRock Inc., Bank of New York Mellon
Corp., J.P. Morgan Chase & Co. and T. Rowe Price Group Inc. to
create a private trading venture to trade big blocks of stocks
without using Wall Street brokers.
UBS AG, Credit Suisse Group AG and Deutsche Bank AG are among
other companies that operate trading platforms in the U.S.
Aequitas plans to launch its new exchange on March 27. Its
founding backers include RBC, Canada's largest bank and operator of
one of the country's biggest dealers; brokers Barclays Corp. and
ITG Canada; institutional and pension fund investors CI Investments
Inc., IGM Financial Inc., PSP Public Markets Inc. and OMERS; and
Canadian telecom giant BCE Inc.
The initiative stems from investment firms' frustrations over
TMX's power over listing, trading and clearing equities and
derivatives in Canada. Aequitas investors weren't part of the
consortium of several of Canada's big banks and pension funds that
won a battle against London Stock Exchange Group PLC to acquire TMX
in 2012 for C$3.8 billion. As part of that acquisition, TMX merged
with Canada's main equity and fixed-income and clearing facility
and its main domestic stock-trading rival Alpha Group.
TMX said at the time that it would use its bigger scale for new
product development, and that it would cut costs and build a
platform for global expansion and growth. But so far, TMX hasn't
made any major acquisitions and its stock is only trading slightly
above the consortium's bid of C$50 a share.
A TMX spokeswoman says the deal has generated
better-than-expected cost savings and helped the company expand its
products and services.
Aequitas has suggested its ownership representation from all
main exchange users--brokers, investors and issuers--lessens any
chance it would charge customers higher trading and listing fees to
boost profits.
One factor in Aequitas' favor is the success that Alpha had
before its merger with TMX. Alpha, backed mainly by the brokerages
of Canada's big banks including RBC, benefited from this group's
order flow to quickly gain share of trading volumes at the expense
of the Toronto Stock Exchange.
In 2009, Alpha's first year of operation, it won close to 10%
share of trading volumes and that level grew to 19% the next year,
according to Investment Industry Regulatory Organization of Canada,
or IIROC. Meanwhile, the combined market share of the Toronto Stock
Exchange and the TMX's junior TSX Venture Exchange fell to 72.6%
from 85.8% over that period.
Aequitas' list of backers doesn't include as many bank-owned
brokers as Alpha had. But it still counts several brokers and
buy-side firms as shareholders and potential sources of buy and
sell orders to help it woo additional trading activity from the
Toronto exchange.
TMX is in a fight to prevent dealers from routing stock orders
to U.S. trading venues in exchange for rebates, circumventing the
Toronto Stock Exchange and other domestic markets.
In October, TMX announced a series of initiatives that take
effect in June to replicate the more attractive economics offered
in the U.S. One pending change is a new model for TMX's Alpha
trading platform that will pay brokers a rebate for some orders to
keep that activity in Canada.
Write to Ben Dummett at ben.dummett@wsj.com
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