Aequitas Innovations Position Paper 240613

7/28/2019 Aequitas Innovations Position Paper 240613

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AEQUITASINNOVATIONS1

AequitasInnovationsInc.InnovationforFairMarketsAequitas[ekwits]:FairnessinLatin

TheDemocracyoftheMarketsismoreofanIllusionthanaRealityCNBCFreeMarketsFairMarketsJune,2013

AequitasInnovationsInc.isaCanadiancorporationthatwillseektoapplyinnovation,technologyandcompetitiontopromotefairnessinthemarketsandfairnesstowardsthetraditionalinvestorsandissuersthecornerstonesofoureconomy.


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TableofContents

TableofContents.........................................................................................................................................2

1. IntroducingAequitas.............................................................................................................................3

a) TheInitiativeLeaders.......................................................................................................................3

b) TheRationale...................................................................................................................................3

c) AchievingTheMission......................................................................................................................4

2. TheAequitasStrategy...........................................................................................................................5

a) InnovationtoAddressChallenges....................................................................................................5

b) AnewApproachtoMarketStructure..............................................................................................5

I. AequitasDark..6

II. AequitasHybrid..7

III. AequitasLit8

c) SustainableMarketMaking..............................................................................................................9

d) BestinClassSORServicestoEmpowerInvestors...........................................................................9

e) AddressingtheCostIssues...............................................................................................................9

f) ACapitalFormationProcessinTunewithIssuersandInvestors....................................................10

3. CanadianMarketplaces,theNeedforImprovement.........................................................................11

a) InvestorsandMarketMakers,insearchofabalancedPlayingField............................................11

b) PublicListings,ontheDecline.......................................................................................................15

c) CapitalFormationforSmallandMid-SizeCorporations,aStruggle..............................................16

d) Dealers,asustainabilityChallenge................................................................................................16

4. NextSteps...........................................................................................................................................18


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1.IntroducingAequitasa) TheInitiativeLeaders

TheMissionStatementofAequitasInnovationsInc.(Aequitas)is:

Aequitaswasfoundedbyagroupofstakeholderswhobelievetoday'sequitymarketplacesdonotprovidethepublicwiththefairness,efficiencyandchoicethatencourageconfidenceandparticipationbyinvestors,issuersanddealers.Theconcentrationofservices,the

dominantmarketstructuremodelandlackofinnovationareattheheartofthisproblem.

Ourstakeholdersincludeprofessionalmoneymanagers,pensionfunds,sell-sideinstitutionsandissuerswhobelievechoice,drivenbycompetitionandbuiltondifferentiationandinnovation,isacutelyneededinCanadianequitymarkets.Thelackthereofthreatensthelong-termhealthofourequitymarkets,andtherefore,ultimately,economicgrowthandemployment.InAequitas,marketparticipantleadershavejoinedforceswiththegoalofestablishingacommercialenterprisewhoseprimeobjectiveistomoreequitablyservethecollectiveneedsofinvestors,issuers,andintermediariesand,asaresult,thepublicatlarge.

b) TheRationaleOneoftheconsequencesoftheglobalphenomenonofdemutualizationofstockexchangeshasbeenthatexchangesandalternativetradingvenuesarenowgearedtomaximizetheirshort-termprofitabilityattheexpenseoflonger-termobjectivesandtheneedsoftheirmostimportantstakeholders:investorsandissuers.

Todaythesevenuescatertovolumegeneratingelectronictradingfirms(HighFrequencyTradersHFTs)andincreasinglytakeinvestor,issueranddealerparticipationforgranted.Thiscontinuesdespitelowinvestorconfidence,companiescapitalraisingchallengesandthecostchallengesofmanydealersfocusedonservicingthem.

ThissituationhasbeenexacerbatedintheCanadiancontextbytherecentmovetowardsalargeconcentrationofservicesinasinglemarketplace:TheTMXGroup1.

1 TheTMXGroupaccountsforapproximately85%oftheequitytrading,100%ofthe tradingofexchangetradedoptionsand futures

contracts,100%oftheclearingofequity,fixedincome,andderivativesinstruments,95%of theequitylistingsandover85%of the

marketdatafeesinCanada.

To create an exchange in Canada that provides an innovative and cost-efficient

marketplacewhich protects the interestof all investors and reflects the fundamental

purposeofmarkets:theefficientallocationofcapitalbetweenissuersandinvestorsasa

centralforcedrivingtheCanadianeconomy


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Inourview,competitionisthebestwaytofosterefficiencyandinnovation,therebyenhancingconfidenceinCanadascapitalmarkets.Forcompetitiontobeeffective,however,itshouldnotbebasedonthemodelsandprinciplesthatcharacterizecurrentmarketplaces.Moreofthesamewillnotaddresstheissuesthatexistintodaysmarketsit

willonlyleadtoadditionalimbalance,costsandinefficiencies.

Aequitasbelievesthereisuntappedopportunitytoleveragetechnologyandcompetitionwhilepromotingliquidity,fairness,costsavingsandmostimportantlyinvestorconfidence.

ThisdocumentintroducesAequitasanditsvaluepropositionsatahigh-level,andalsoprovidesamoredetailedviewofthekeymarketstructuresolutionsthatwehaveidentifiedtofulfillourmission.Overtimeandafterdiscussionswithinvestor,issueranddealerrepresentatives,otherinnovativesolutionsandfurtherdetailswillbesharedleadingtoanintegratedvaluepropositionthatwillbepublishedforcommentinAequitasformal

applicationforrecognitionasanexchange.

c) AchievingTheMissionWithinthecontextoftodaysmarkets,weofferauniquelydifferentiatedandinnovativevisionofhowamarketplaceshouldfunctionandwhomitshouldserve.Specifically,Aequitasproposes:

Anownershipandgovernancestructurebuiltwiththecorefoundingprincipleofservicinginvestorsandissuers;

Advisorycommitteesthatgiveinvestorsandissuersastrongvoice; Solutionsdesignedtopromotefairnessandencourageinvestorconfidencein

Canadasequitymarkets,whileprovidingissuerswithacapitalformationtoolsetthatwillsupporttheirsuccessandgrowth;

Technologythatfacilitatesmarketqualitybyhelpingeliminatethemostprevalentpredatorytradingstrategies;

Aplantopromotesustainablemarketmakingwhichwillsupporttheliquidityneedsofinvestorsandissuers;and

Innovativeandaffordableservicespositionedtoplacemeaningfulcompetitivepressureonincumbentplayers.


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2.TheAequitasStrategya) InnovationtoAddressChallenges

AequitashasdevelopednewapproachesdesignedtobringmeaningfulcompetitionandchoicetoCanadianmarketplaceparticipants.Aequitaswillofferahighlydifferentiatedalternativetothedominantmarketstructuremodelthatwillcatertotheneedsoftraditionalinvestorsandissuers,protectagainstpredatoryandopportunistictradingstrategies,andenhancethecapitalformationprocess.Ourapproachwillinclude:

Newmarketstructuresolutions; Aplantofostersustainablemarketmaking; BestinclassSmartOrderRouting(SOR)services; Aplantoaddressthecostissuesofmarketplaceusers;and Capitalformationenablingsolutionsintunewithissuersandinvestors.b) AnewApproachtoMarketStructure

TheAequitasmarketstructureapproachseekstoapplyinnovationtoaddressintereststhatarenotcurrentlybeingservedandmarketconfidenceissues.Untilrecently,manypeoplebelievedthattechnologywouldonlymakemarketsmoreefficient.Now,withthebenefitoftimeandexperience,theyunderstandthatnotallchangeshavebeenpositive.

SomeobserverspositionHFTsasspecialistsinliquidityprovisionineffect,today's

marketmakers.However,despiteadvantageoustechnologicalaccessandfinancialsubsidies,theseplayershave(incontrasttodesignatedmarketmakers)noobligationtothemarket.Oftentheycompeteforthesameliquidityasinvestors.

Webelievetoday'smarketsfallshortofthepublicsexpectationthatourindustryoughttousetechnologyandcompetitiontoimprovemarkets.Rather,someuseittoextractanunconstrainedtollfrominvestors,largeandsmall.Thesetrendsalsodiscouragetruemarketmakersfromprovidingliquidityparticularlyinsmallcapnameswhereitismostneeded.

Aequitasproposessolutionstotheseglobalmarketchallengesthatwillbringchoiceto

groupsofmarketparticipantswhoaredisadvantagedinthecurrentenvironment.Webelievethesemeasuresarecriticaltorestorebalanceandwillpromotepricediscovery,liquidity,competition,innovationandmarketintegrity.

Aequitasproposedmarketstructurecombinesmultipleorderbooks,innovativeapproachestomatchingprioritiesandmarketmaking,aswellasthepreventionofinappropriatetradingstrategiesasthefoundationofaneco-systemthat:


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Recognizestheroleofhealthymarketmakingwithbenefitsandresponsibilities; Discouragesstrategiesthataredamagingtoprinciplesoffairnessandmarket

confidence;and

Offersaviablealternativetorebateincentivesandmaker-takerpricingwhichAequitasbelieveshasnegativelyimpactedmarketquality.

Thefollowingdiagramillustratesthehigh-levelmarketplacedesignoftheAequitaseco-system:

Diagram1:TheAequitasbasicMarketStructureEco-system

Thefoundationofourproposedmarketstructuresolutionistheestablishmentofthreecoreorderbooks:Dark,HybridandLit.EachisdesignedtoserveaseparateyetintegratedroleintheAequitaseco-system.IntegratingtheseorderbookswithothermarketplacesisaSORsolutionthatwediscussinmoredetailinSection2(d).

Next,wewillbrieflydescribetheproposedstructureandobjectivesofeachofthethreecoreorderbooks.

I. AequitasDarkSimilartoexistingdarkpoolsoperatinginCanadatoday,AequitasDarkwouldoffernopre-tradetransparency.ConsistentwithCanadasdarkrules,matchingwouldoccuratmid-point,oratleastonestandardpriceincrementfromtheNationalBestBidandOffer(NBBO),atregularpriceincrements,orattheNBBOforactiveordersprovidedtheyareforatleast50standardtradingunitsor$100,000invalue.

Activelyremovingliquiditywillonlybeavailabletoretailandqualifyinginstitutionalparties.Theobjectiveofthisrestrictionistopreventpredatorytradingstrategiesand


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encouragequalityrestingliquidity.Toimplementthislimitation,theDarkBookwillrestrictShort-MarkingExempt(SME)participants2fromtakingliquidity.

TherearenoproposedrestrictionsonwhomaypostliquidityinAequitasDark.

Furthermore,partiespostinginthedarkbookwillhavetheoptionto:

Specifyminimumquantitiesoncounterpartysizeandfillsize; Interactonlywithactiveretailorders3; Interactwithcontrarestingliquidity;and Offeradditionalliquidity(sizeup)intheeventofapassive-passivematch.4

Theproposedmatchingpriorityisasfollows:

1. Price2. Broker3. MarketMakerforthesecurity54. WeightedSize/Time6

Theweightedsize/timematchingprioritizationmodelanswersimplicitfairnessissuesassociatedwithtime-dominantmatchingmechanisms.Aequitasbelievesthissystemwillbemoreequitable,fosterlargerandmorereliablerestingorderswhile,atthesametime,deflectingpredatoryliquidityprovisionstrategies.

TheAequitasDarkfeemodelwillnotbeamaker-takerfeemodel.

AequitasDarkhasbeendevisedtoencouragenaturalpassiveliquidityandmarketmakingwhilerestrictingSMEparticipantsfromtakingliquidityinapredatoryfashion.Itsproposedsize-upfunctionalityisbeingofferedtoallowinstitutionalparticipantstoleveragedarkalgorithmicstrategiestomarshalliquidityresidingintheirblotteroronanothermarketwiththegoalofcontributingtosizediscoveryconsistentwithanappropriaterolefordarkbooks.

II. AequitasHybridTheAequitasHybridbook7issonamedasitsharescertainpropertiesofbothlitanddarkbooks.ItwouldonlydisplayliquidityandpermittradingtooccuratorwithintheNBBOat

2 Generallyarbitrageaccounts,an account ofa personwithMarketplaceTradingObligations (MarketMaker), ora fully automated

accountthatholdsnominalpositionsattheendofeachtradingday(seeIIROCUMIR1.1forfulldefinition).

3 Furtherconsiderationwillbegivenintorefiningthedefinitionstoaddressanyissuesregardingcompliance.4Aequitashasfiledapatentforitssize-upfunctionality.5 WediscusstherationaleforthispriorityfunctionalityfurtherinSection2(c).6 AequitashasfiledapatentforitsWeightedSize/Timematchingprioiritizationmodel.7 AequitashasfiledapatentforitsHybridBook.


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regularpriceincrements.Further,itwouldonlydisplayaggregatedliquidity(numberofshares)availableateachpricelevelwithnoindividualrestingorderinformation.

AequitasHybridwouldrestrictSMEparticipantsfromremovingliquidity.Therationale

hereisthesameasinAequitasDark:tosuppresspredatorytradingpracticesandpromotequalityrestingliquidityinthiscasevisibleliquidity.Allparticipantswillbefreetopostliquiditynotably,withtheconfidencethattheyareprotectedfromaforementionedpractices.


1. Price2. Broker3. MarketMakerforthesecurity84. WeightedSize/Time9

TheAequitasHybridfeemodelwillnotbeamaker-takerfeemodel.

III. AequitasLit TheAequitasLitbookisamoretraditionallitbookwithoutanyparticipantrestrictions.Itwillofferthedominantmaker-takerpricingmechanismemployedbymanylitmarketplaces.


1. Price2. Broker3. Non-SME4. Time

WhileAequitasisoftheopinionthatthemaker-takerfeemodelhasgenerallybeendetrimentaltomarketquality,weintendtooffersuchabookinordertocompetewiththecurrentdominantbookmodelsofferedinthemarketplace.ItisourintenttobenchmarkourlittakefeesgenerallytothetakefeesintheCanadianmarketplace.10OurcommitmentistolowerourfeesintandemwithanyreductionintakefeesinCanada.

Aequitasintendstoofferprioritytorestingnon-SMEordersbothwithinindividualbrokerpriorityandingeneralinitsorderbook.Theintenthereistoensurethatordersfromnaturalinvestorsenjoyhighpriorityinobtainingfillsforrestingorders,andtorestrictpredatoryliquidityprovisionstrategies.Otherthantheabove,restingtimeprioritywillbefeaturedinthisorderbook.

8 WediscusstherationaleforthispriorityfunctionalityfurtherinSection2(c).9AequitashasfiledapatentforitsWeightedSize/Timematchingprioiritizationmodel.

10CurrentlyTSXcharges35milstotakeforhighpricedsecurities.


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PerhapsthemostimportantfunctionofAequitasLitwillbetoserveasthevenueformarketmakerstomeettheliquiditydisplayobligationsassociatedwiththeirrole.Wediscussthegeneralphilosophyandrationaleofourmarketmakerprograminthefollowingsection.

c) SustainableMarketMakingAequitasintendstoofferamarketmakingprogramforbothAequitaslistedsecuritiesandsecuritieslistedonotherexchanges.Therewillbeperformanceobligations(spread,depthandpresence)forsecuritiesofresponsibility.ResponsibilitieswouldbemetviatheAequitasLitbook.

AequitaswouldrequiremarketmakerstobeIIROCmemberswhoaremembersoftheAequitasExchange.WealsoproposeallowingDirectExecutionAccess(DEA)clientstoactasmarketmakersprovidedtheirSponsoringDealeragreestobeaccountablefortheir

actions.Webelievethiswillfosterliquidityinagreaternumberoflistingsandencouragenon-CanadiandomiciledHFTstoparticipateastruemarketmakersandaddvaluetoourmarket.

Forsecuritiesofresponsibility,priorityintheAequitasDarkandHybridbookswouldbetheprimaryincentiveofferedtomarketmakers.Aequitasbelievesgrantingpriorityinthesebookswillbeavaluedfunctionalbenefitformarketmakers;and,importantly,onethatdoesnotrelyonafinancialsubsidybasedonthemaker-takerfeemodel.

Importantly,asourSORwillbegearedtowardscombatingbookfade,itwillbethephilosophyofAequitastoestablishmarketmakingobligationsthatarerealisticand

consistentwithachievinglargeraveragetradesizes.Thisisimportant,asourSORwillconstantlystrivetoholdourmarketmakerstothequotesthattheydisplay.

d) BestinClassSORServicestoEmpowerInvestorsWithpartieslookingtocapitalizeonthesystemicweaknessesintodaysmarketeco-system,itisourviewthatinvestorsandmarketqualityhavesuffered.Accordingly,investorsanddealersrequirenewtoolstohelpthemcopewiththeserealities.

AequitasintendstoofferabestinclassSORservice11designedtohelpparticipantsaccessliquidityacrossvarioustradingvenueswhileavoidingtheorderbookfadesocommonin

todaysmarkets.TheAequitasSORofferingwillplaceapowerfultoolwithinreachofallinvestorsanddealers.

e) AddressingtheCostIssuesNotwithstandingourconcernsabouttheimpactofmaker-takerpricingintodaysequitymarkets,Aequitasrecognizesthecurrentdominanceofthismodel.Assuch,wehave

11ThemodelunderlyingtheAequitasSORispatented.


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concentratedoureffortsondivisingaunifiedeco-systemthatemphasizesinvestor-focusedfunctionality,sustainablemarketmakingandcostefficiency.

WhilepricingfortheAequitasDarkandHybridbookshasyettobefinalized,ourgeneral

intentistoofferalowtake-takefeemodelacrossbothofthesebooks.Further,inordertofostercriticallyimportantretailorderflow,Aequitasintendstoofferdiscountsonactivefeesforretailtradingnetworks.Thispricingapproachwillprovidesubstantialsavingsforbothretailandtraditionalinstitutionalinvestors.

TheAequitasLitbook,inrecognitionoftheclearrolemaker-takercontinuestoplayinourmarketplace,willofferfeescommensuratewiththoseofCanadasothermake-takemarketplaces.Thatsaid,Aequitasbelievesthatitssuiteofofferingsandeco-systemwillapplymaterialcompetitivepressureonthemake-takemodelingeneralwhichitbelieveswillmoderateindustrydependenceonthispricingschemeovertime.

Aequitaswillalsoproposeahighlycompetitivefeemodelforitslistingsofferingaswellasanewmarketdataoffering12thatitanticipateswillprovideenhancedvalueincomparisontoanycurrentsinglemarketplacesdataofferingatconsiderablecostsavings.

f) ACapitalFormationProcessinTunewithIssuersandInvestorsEarlyandmid-stagecompaniesseekingcapitalfinditincreasinglydifficulttoobtainfundingfromthetraditionalsourcesofcapitalraising:venturecapitalandthepublicmarkets.Partofthisdifficultystemsfromthefactthatthecostandoverallburdenofbecomingapubliccompanybecameveryhigh.Furthermoregoingtothepublicmarketsisonlyasuccessfulstrategyforthosecompaniesthatcandemonstratetangibleprogressand

growthtosupportliquidity.

Tofacilitatethesecompaniesaccesstocapital,Aequitaswillintroduceacentralizedmarketplaceforexemptsecurities(ESM)13focusedonearlyandmid-stagecompanies.TheESMwillnotonlyallowthesecompaniestoraisecapitalfromaccreditedinvestorsandotherpermittedparticipants,butitwillalsoallowthemtobenefitfromsecondarytradingtoprovidetheirinvestorswithliquidity.TheESMwillalsorepresentanewbusinessopportunityforthedealercommunityintheCanadianmarket,asaccesswilltakeplacethroughregistereddealers.

12 Aequitashasfiledapatentforitsnewmarketdataoffering.

13AequitashasfiledapatentforitsESMmarketplace.


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3.CanadianMarketplaces,theNeedforImprovementa) InvestorsandMarketMakers,insearchofabalancedPlayingField

ThecurrentdominantmarketstructuremodelforCanadasmarketplacesattractsandprefersHFTsovertraditionalinvestorsandtruemarketmakers.Thisevolution,whichisnotlimitedtoCanadabutisglobalinnature,occurredbasedupontheprevailingviewthatthesetraditionalplayersarecaptiveclienteleofthemarketplaces.14

SomejustifythepresenceofHFTsasnecessarytofosterliquidityanddownplayanyadvantagebestowedonHFTs,arguingthatpreferentialaccessisequallyavailabletoallandthatfeesareunbiasedandtransparent.

Whiletheseargumentsaretechnicallytruetheyoverlooksomeimportantrealities:

Thetoolsofferedbymarketplacesareuniquelyusefultoavoidinvestingrathertheyareroutinelyleveragedtosidesteptheaccumulationofanymeaningfulposition;

Thesametoolscanalsobeusedtoreadandanticipateinvestordemandinthemarketplaceinrealtimeallowinglowriskprofiteeringfromveryshort-termmovesagain,atthecostofnaturalinvestors;

Bynatureinvestorsareliquiditytakers;thereforeheldhostagetoseekoutliquidityacrossmultipleandconstantlychangingmarketeco-systems-inthisenvironmenttheslightestmis-stepcauseslostliquidityandhighercoststoinvestors;and

Thecosttomaintaintheseeco-systemsfallssquarelyoninvestorsandthenetworksthatsupportthemcomingintheformoffeestotakeliquidity,highandbiasedfeestructuresformarketdataandgenerallybeingforcedintoatechnologyspendingarmsracewithnochoiceandquestionablebenefits.

Ingeneral,theaboveevolutionhasfavoredopportunisticandpredatoryprofitingbynon-investorintermediaries,whiletraditionalinvestorsincreasinglyseethemarketsasstackedagainstthemandformalmarketmakingbecomesunsustainable.

Notsurprisingly,investorsareaccountingforlesstradingvolumesandformalmarketmakersaredwindling.Diagram2showsIIROC'sHOTStudyresultsforvolumebreakdownforthedataitreviewedaspartofitsstudy.

14 InAequitasopinion,theOrderProtectionRuleandsimilarregulationsinothercountrieshaveenabledtheexpansionofHFTactivity

and,asanunintendedconsequence,ofpredatoryandopportunistictradingstrategies.


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Diagram2:VolumeBreakdowninCanadianmarkets(IIROCHOTStudy2012)15

Asaresult,marketqualityischallenged:

Displayedspreadsarenolongerthespreadsatwhichmostmarketparticipantstrade.Whiledisplayedspreadshavenarrowed,theeffectivespreadsatwhichtraditionalinvestorstradehavebeenincreasinglysubjectedtovolatileintradaypricemoves(seeDiagram3-PartC);

Thedisplayedpictureofliquiditysupplyisnolongerreliablefortraditionalinvestorslookingtotransactinsizesbeyondasingleboardlot(seeDiagram4);

Overwhelmingamountsofmarketdataofdecliningmarginalvaluehasleadtoalackofconfidenceindisplayedquotesandincreasedcostsforparticipantstoprocessitinparticular,forthosemaintainingnetworkssupportinglong-terminvestors;

Smallandmid-capsecuritiesareinadownwardliquidityspiralasdesignatedmarketmakershavebeencrowdedoutofthemarkets.

15IIROCHOTStudy2012:http://www.iiroc.ca/Documents/2012/2fb137e3-4371-43bd-b567-59b789a1e4d7_en.pdf


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Diagram3:Volumes,SpreadsandIntradayVolatilityinCanadianMarkets

(EvolutionofCanadianEquityMarkets,RBC,February2013)

Diagram4:PercentageofFleetingOrdersinCanadianlitMarkets

(CanadianOrderFlowTrends,ITG,April2013)

Ithasbeennotedbymanypunditsthatintradaytradingactivityhasmadetradingmorechallengingforinstitutionalinvestors.


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Turbevillestates:

Bid/AskspreadsmaynotwidenwithHFTactivity,butpricelevelsarealteredtothe

detrimentoflargeinstitutionalinvestorsthattransactlargepositions.HFTseliminateall

meaningfuldepthofinterestforashortperiodoftime.16

AequitasbelievesthattodaysmarketstructurealsohasanequallyimportantimpactonretailinvestorssomethingwehighlightinDiagram5.

Diagram5:ShiftinIntradayTradingRanges

(RBCMarketStructureConference,April2013)

Thediagramaboveshowsaclearandpermanentshiftinshort-termpricevolatilitythathasbeenmostdramaticduringtheearlymorningsession,therebysuggestingademonstrableimpacttoretailtradingactivity,whichtendstotradeparticularlyheavilyduringthistimeperiod17.

SimilardevelopmentshavebeenobservedinothermarketssuchastheU.S.andEurope,andareemergingacrossotherregionsintheworld.

Curbingthesetrendsistheresponsibilityofallmarketstakeholders,andAequitasbelieves

thatsustainablesolutionswillonlyresultfromdifferentiatedcompetitivemarketplaceofferings18.

16 WallaceC.Turbeville,CracksinthePipelinePartTwo:HighFrequencyTrading (March8,2013)

17 RBCestimatesthatabout60%ofitsretailorderflowtradesmostdayspriorto11AM.

18 Weshouldnotandcannotexpectallmarketstructureissuestobeaddressedonlybytheregulators.Differentiatedcommercialsolutions,

withcloseoversightbytheregulators,areneededtobeabletoaddressdifferentinterestsandacontinuouslyevolvingenvironment.


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b) PublicListings,ontheDeclineTheinvestorconfidenceproblemisafrequentlydiscussedtopiclargelyrecognizedbyCapitalMarketsstakeholdersglobally.WearehoweveralsofacinganIPOchallenge.

AsdemonstratedinDiagram6,lessandlesscompaniesareinterestedingoingpublic.

Diagram6:GoingPublicLaunchofSmallIPOs

(LetterfromthePresident,vol.58,IIAC,February2013)

Thereareseveralreasonsforthis:

Manypublicallylistedsecuritiesshowlimitedaccessibleliquidity,impactingtheircostofcapitalforanyfutureroundsoffinancing;

Thepathofpubliclistingispromotedtocorporationsthatarenotprepared:notpreparedfortheregulatory,managerialandfinancialburdenthatcomeswithapubliclisting,notpreparedtoattractinvestorinteresttofueltheirliquidityandnotpreparedtounderstandtheresponsibilitiesofgoingpublic;

Truemarketmakers,committedtoliquidityobligationsandcriticaltonewlistings,aredwindlingandthereforethereislessandlessliquiditysupportavailablefornewlylistedcompanies;and

Initiativestotackletheharmthatiscausedtoissuersbyexacerbatedintra-daypricevolatility,liquidityerosionorhamperedbuy-backoperations,arescarce.

Forpubliclylistedcompanies,Aequitasbelievesitiscriticaltore-establishapartnershipbetweentheexchange,theissuerandtruemarketmakers.Forcorporationsthatarenot


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readyforapubliclisting,butneedaccesstocapitalandliquidity,Aequitasbelievesthereisaneedtoprovidedifferentinnovativealternatives.

c) CapitalFormationforSmallandMid-SizeCorporations,aStruggleSmall-andmid-sizehigh-growthcorporationsarethefoundationforfutureeconomicgrowthandemployment.

InCanadathesecorporationsarefindingitincreasinglydifficulttoaccessthefinancingtheyrequiretofuelthisgrowth(seeDiagram7).IPOsareoftennolongeraneffectivesolutionandmanyrapidlyfallbackonM&AexitsorforeignsolutionsthatthwarttheirCanadianambitionsandpotential.

Diagram7:LimitedAccesstoMarketsSmallEquityFinancing

(LetterfromthePresident,vol.58,IIAC,February2013)

Aequitasdoesnotbelievethattheproblemisalackofpotentialcapitalprovidersorthelackofpromisingissuers.Thechallengeistoallowsmallerissuerstointeractwithrisktolerantinvestorsinawaythatsupports,withtherightscaleandtimeliness,liquidity.Aequitasbelievesthatlocalangelinvestornetworkshaveshownushowthiscanwork.Weintendtolearnfromthemandamplifytheirmodelonanationwidelevel.

d) Dealers,asustainabilityChallengeThesuccessoftheprimarystakeholdersofamarketplace,issuersandinvestors,alsolargelydependsonthequalityofservicetheyobtainfromdealers.


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Thequalityofdealerserviceistheresultofchoice,competitionandinnovation,justasitiswithmarketplaces.Hereanotherissueemerges:theCanadiandealercommunity,andinparticularthesmallboutiquefirms,areunderthreat.

Diagram8showstheevolutionofoperatingprofitamongstdifferentcategoriesofdealers.

Diagram8:OperatingProfitIntegratedvs.InstitutionalandretailBoutiques

(LetterfromthePresident,vol.59,IIAC,March2013)

Attheendoflastyear,closeto50%oftheCanadianboutiquedealerswerelosingmoneyandweexpecttoseeanincreasingnumberofcasualtiesresultingfromthistroublingtrend.

Thisisaconsequenceofdecliningvolumesandincreasingoperatingexpenditure.Whilethelatterisaconsequenceofmultipefactors,Aequitasbelievesthatthedominantmarketstructuremodel,whichtaxesthesmalldealersinvariousways,isanimportantpartoftheissue.Thelackofresponsivenessofmarketplacestoalleviatethedealerscostburdensbypromotingnewmarketstructuremodelsandreasonablemarketdatapricingneedstobeaddressed.


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A E Q U I T A S I N N O V A T I O N S 18

4.NextStepsThenextstepsforAequitascanbesummarizedinonewordDialogue:

Dialoguewithinvestorsandissuerstoobtainfurtherinsightsandensurethatoursolutionstrulyaddresstheirissuesandchallenges;

Dialoguewithdealers,inparticularthesmallerandmid-sizefirms,toensurethatoursolutionswillprovidethemwiththerelieftheyneed;

DialoguewithregulatorstoexplainoursolutionsandthebenefitofenablingcommercialsolutionsthatwillensuremorebalancedandefficientCanadianCapitalMarketsthatultimatelywillleadtoastrongereconomy.

Aequitas'proposaltooperateanexchangeissubjecttoregulatoryreviewand,inthatsamespiritofdialogue,wehavecommenceddiscussionswithapplicableregulatorsinadvanceof

thefilingofaformalapplicationforrecognitionasanexchange.Aequitasplanstofiletheformalapplicationtowardstheendof2013.

Thispaperisnotasubstitutefortheregulatoryprocessthroughwhichtheformalapplication,whichwillincludespecificdetailsoftheproposal,wouldbefiledbyAequitasandpublishedforcomment.Aequitaswillbeprovidingadditionaldetailregardingitsproposalaspartofthatprocess.

Ourmandateistoimprovemarketquality,promotefairnessandfostereconomicgrowthwith

allstakeholdersinmind.Toallowustosuccesfullyexecutethisplan,stakeholderinputis

critical.Welookforwardtoyourinput.

Weareatacrossroadsforourmarkets:Makeyourvoiceheard.

Aequitas Innovations Position Paper 240613

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