Canadian exchange pursues “fairer markets” with MillenniumIT deal
Canadian ‘challenger’ exchange Aequitas, which plans to favour long-term investors by discouraging HFT, has chosen a trading engine and several other tools from MillenniumIT, the Sri Lanka-based technology company owned by the London stock Exchange.
Founded by Jos Schmitt, who was previously chief executive at Canadian alternative trading system Alpha ATS, Aequitas is a new venue that plans to launch next year. Backed by the Royal Bank of Canada, Barclays, BCE, CI Investments, IGM Financial, ITG Canada, OMERS Capital Markets, PSP Public Markets and RBC Dominion Securities, its aim is partly to address the perceived unfairness of the markets, in which high-frequency traders are often accused of ‘scalping’ institutional investors by getting in front of their orders and then selling securities against them at inflated prices.
MillenniumIT will provide Aequitas with its MillenniumExchange trading engine, as well as its branded smart order router and market data tools. MillenniumExchange is the same trading engine that has been used by the London Stock Exchange since March 2011. However, according to Mack Gill, chief executive at MillenniumIT, the platform has been customised so that it fits the slightly unusual requirements of Aequitas and the Canadian market.
“Aequitas is doing a lot of things differently,” Gill told Banking Technology. “For example, they are looking to curtail latency arbitrage so that they can increase the number of fills customers get. The logic in the routing technology allows the exchange to manage things like latency and to control incoming orders. They have a focus on market fairness. Everyone knows that is an issue in the market. It’s a new approach and it’s great to be working with these guys.”
The fairness of equity markets has been hotly debated for years. At the centre of the argument is HFT, a concept that has no clearly agreed definition but is largely understood as a form of trading in which ultra-fast connectivity is used to buy and sell orders in a fraction of a second, taking advantage of opportunities that may not be visible to slower-moving market participants. The arguments over HFT have occupied the European Commission and the US Securities and Exchange Commission as well as other regulators ever since the financial crisis, but the debate has reached a renewed height of intensity following the publication in March of the book Flash Boys by Michael Lewis, which alleges that the US stock market is rigged.
While that position has been challenged by some commentators and advocates of HFT such as Manoj Narang, founder and chief executive at high-frequency trading firm Tradeworx, on the grounds that HFT provides liquidity and creates narrower spreads, thereby benefiting the whole market, many regulators around the world have sought to introduce rules controlling HFT. Nevertheless, Schmitt at Aequitas has stated that a commercial solution may be preferable to a regulatory one.
“At Aequitas, we are building an exchange of the future using a bold blueprint that puts issuers and long-term investors first,” said Schmitt. “This tailored technology design will allow us to re-establish more fairness in the markets, strengthen the capital formation process and introduce innovation and meaningful competition in the marketplace landscape.”
According to Gill at MillenniumIT, the tools do exist to allow exchanges such as Aequitas to tailor their own market in such a way as to attract any kind of participant they wish, while controlling the way those participants interact with each other. In particular, the package MillenniumIT is supplying to Aequitas contains a “flexible tools area” where the user can change things without touching the underlying code. The changes in question specifically come down to the way matching works, and the way market data is provided to participants – which is one of the key issues at stake in the wider debate over ‘scalping’. “It’s not anti-HFT,” said Gill. “HFT has a role in the market. But the appeal to long term investors is central to Aequitas’ business model and we want to support that.”
Aequitas is backed by the Royal Bank of Canada, which is the same organisation that IEX founder Brad Katsuyama was working for when he began to investigate the issues around HFT. Essentially, the problem identified by Katsuyama was that ultra-fast market data and connectivity allowed HFTs to spot a large incoming order from an institutional trader as soon as it arrived at any trading venue. If that order could not be filled at the first venue, as is often the case, the HFTs are able to quickly purchase the remaining securities and then sell them back to the institutional trader at a higher price, before that trader’s order ever even reaches the second venue. By instituting intentional delays into the system so that large orders are broken down into many smaller parts which then arrive at all venues at the same time, RBC was able to eliminate the problem. Aequitas plans to launch with similar features on its trading venue, which Schmitt has described as “speed bumps” and fees designed to make HFT uneconomic.
The LSE bought MillenniumIT for £18 million in 2009, as part of a push to diversify its revenue sources and compete with other global exchanges such as Nasdaq OMX. In the years since, the firm’s trading engine has been sold to 30 exchanges around the world, including Johannesburg Stock exchange in South Africa and the Singapore Exchange, which bought a clearing system from MillenniumIT in November. The company is currently working with Peru’s Lima Stock Exchange to install a new trading engine later this year, and has signed a deal with Argentina’s Buenos Aires stock exchange. For Gill, the Americas is an important market.
“I am bullish about Argentina in the long run,” he said. “Argentina has had challenges with the way it is perceived, but bringing industry standard technology to that market is sending a good message to the international investment community. Argentina and Peru are very important for us, and we see a lot of opportunities in the US, too so you can expect to see more of us in the Americas. Of course, I lived in New York for 19 years, so maybe I am a little biased when it comes to the US.”
Gill has just completed his first year as chief executive at MillenniumIT. Before he joined the company, he spent 19 years working for SunGard, for much of which he was based in New York. He also spent a lot of time visiting Asia, which he says was a factor in his interest in MillenniumIT. His initial curiosity about how a small Sri Lankan company could catch the attention of the London Stock Exchange later morphed into admiration, he says, as he came to appreciate the firm more closely.
“Although there is some advantage from the low-cost environment, the company’s real advantage is its intellectual capital and the people we have – that’s what explains impact MillenniumIT has had,” he said. “That’s why I jumped at the chance to take this job. Of course, we’re known for our equity matching engine, but the architecture we have can actually cover other asset classes, as well as smart order routing and post-tarde clearing. I feel that having a single platform that covers pre- and post-trade is a real differentiator for us.”