Several major financial services companies, including the Royal Bank of Canada, are planning to launch a new Canadian stock market.

The venture, to be called Aequitas Innovations Inc., would be a rival to the Toronto Stock Exchange and other markets owned by the TMX Group Inc., as well as other Canadian exchanges.

The new group, which includes several major pension and mutual funds and a U.K.-based bank, says its exchange would introduce meaningful competition, reduce costs and improve market efficiency through innovation.

Aequitas said it would also address the growing problem of high-frequency trading. These super-fast computer-generated trades can reap short-term benefits out of markets at the expense of traditional longer-term investors, such as pension and mutual funds, the group said.

“This is a bit of a grassroots initiative where market participants representing the average Canadian investor are saying we need some choice in this market,” Jos Schmitt, president and chief executive officer of Aequitas, said in an interview.

Other Aequitas backers include two large Canadian mutual fund companies, CI Investments Inc. and IGM Financial Inc. (Investors Groups and Mackenzie Financial), and U.K.-based international brokerage firm Barclays Corp Ltd.

Aequitas said it hopes to have its proposed exchange, which is subject to regulatory review, up and running before the end of 2014.

High frequency trading became an issue around the world after the May 6, 2010 “flash crash,” a near record 1,000-point plunge in the Dow Jones Industrial Average that lasted just minutes, when high-frequency traders piled into the market after a single large mutual fund trade kicked their computers into high gear.

Computerized trading also played a role in April, 2013, after a fake tweet saying U.S. President Obama had been hurt in a White House explosion sent markets into a tailspin before the report was quickly denied.

While there are acceptable high-frequency trading practices that can contribute to market quality, certain predatory strategies can negatively affect the market and create excessive costs for investors and issuers, Aequitas said.

For example, high-frequency traders can take advantage of differences in speed of execution in one market to place bets against ordinary institutional or individual investors in another market, whether it’s the Nasdaq or the TSX.

These price differences are virtually imperceptible, perhaps a few pennies at a time and lasting no more than a few minutes, but they can add up to big gains for high-frequency traders, Schmitt explained.

High frequency traders account for up to 42 per cent of all trades, a recent study by the Investment Industry Regulatory Organization of Canada found.

The jury is still out on whether high-frequency trading helps or hurts markets, said Eric Kirzner, a professor at the University of Toronto’s Rotman School of Management and director of its Capital Markets Institute.

A relatively new phenomenon, it’s becoming the subject of academic research, he said.

The move to create Aequitas comes less than a year after a rival group of banks, pension and mutual funds calling itself the Maple Group bought the TMX Group in a hostile takeover bid. The move succeeded in fending off a $3.7 billion merger with the London stock exchange.

Robert Young, head of Liquidnet Canada, a Toronto-based global network that specializes in large institutional trades, said he wasn’t surprised the Royal Bank and others wanted to start their own exchange.

“We’ve seen next to nothing in terms of the sorts of savings and fee cuts or efficiencies that were promised in the Maple transaction,” Young said.

Canada is now home to at least 12 different stock exchanges, including the TSX Venture Exchange, which specializes in smaller companies. The TSX’s influence has been diminishing but it still handles nearly 60 per cent of all trades, by dollar value, according to industry data.

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Schmitt was previously head of the Alpha Group, a bank-led rival to the Toronto Stock Exchange that became part of the TMX group during the Maple takeover.

Aequitas also plans to offer “dark” trading, which allows stock holders to buy or sell very large blocks of stock anonymously without triggering huge price swings.

It also plans to provide a private market that connects investors with smaller companies that are not ready to go public.

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