VIDEO: Aequitas NEO Exchange Inc. is a New Canadian Stock Exchange

MidasLetter Live

Aequitas Neo Exchange Inc. CEO Jos Schmitt talks about creating a trading environment that puts investors first along with quality companies looking to raise capital. High frequency traders are being put on a level playing field with “natural” investors. The Neo Exchange platform includes all publicly listed companies in Canada inclusing the TSX, TSX.V and CSE in addition to companies listed directly on the NEO Exchange.


James West:    Jos, thanks for joining us today.

Jos Schmitt:   Pleasure.

James West:    Jos, let’s start with an overview: What is it that differentiates the NEO Exchange from the existing exchanges, the TSX and the CSC?

Jos Schmitt:   Well, NEO was created and designed a few years ago now to come with a marketplace that would put really the investors and the companies seeking to raise capital first again, and that translates itself in a trading environment where we have a lot of mechanisms that, on the one hand, seek to protect investors from opportunistic behaviours, you know, that are typically coming from a subset of the high-frequency trading community. And what we’re also focusing a lot on in our trading environment is, how do we ensure quality liquidity. And I think there’s lots of concerns about that, lots of issues and comments, and I think we gave it a model, and that model works.

So we have fascinating results we can talk about later.

James West:    Sure. So specifically, you are targeting high-frequency sellers and barring them from your platform?

Jos Schmitt:   We are not barring them, but we are creating a level playing field. And because they have an informational advantage, there’s an asymmetric access, if you want, to information depending on the capabilities you have, what you are willing to pay for market data fees, what you are putting in place as network structure or putting your computer next to the computers of an Exchange. Well, we have built in our entire trading model a series of components, there is a speed bump, there is a different way of matching all of this, we always give natural investors priorities, some other components that create really a level playing field again. So that as an investor, you can be confident that when your order is handled in our market, and when we execute on our market, it was a fair game.

James West:    You’re not paying a premium for a scalper in there.

Jos Schmitt:   That’s really what it is, yeah.

James West:    Sure. Okay, so how many entities currently trade on NEO, what is their sort of category makeup, and where do you see that going in the next 12-24 months?

Jos Schmitt:   Well, today, we trade all publicly listed companies in Canada, whether they are TSX-listed, TSXV-listed. Recently we also made available for trading the CSC-listed companies, and of course, our own listed companies. Why is that? Well, because that search for a good experience, that search for making sure that the investor is a winner, is something that applies to any listed product. So that is really how we approach it.

If you look at it from a pure listing perspective, so that’s a different value proposition that we have over there, that today we have been very successful since our launch in attracting Exchange-traded funds. So we are there pretty much on par now, I would say, with the TSX, and we also have our first corporate-listed, at the end of last year, when we made an announcement about a second one, and more to come.

And there, our value proposition is, again, very much focused on liquidity. If you go public, you know, it’s important that you have liquidity. We focus also on helping those companies to be able to reach out to the investor community, instead of being, you know, number 672 on an Exchange. We focus a lot on giving them quality service in the entire process of going through an initial listing or, you know, any transactions that take place. We heard a lot of comments about that. And we come with an attractive fee structure.

Now what is important to know, and I did mention: from a listings perspective, that is that we only list senior companies. That’s important to be aware of.

James West:    When you say ‘senior’, what’s the minimum market cap?

Jos Schmitt:   So we would typically work, if you look at our market cap standards – so, we have different standards we can use, but the market cap we would look at would be 50 million. That would be the minimum. And our focus is really, you know between 50 and, call it, 1 billion, where you have lots of good companies that, today, that would like to go public, but don’t get what they were hoping to get out of the public listing. And again, it comes to liquidity, it comes to investor awareness, or whatever it is. And if you are more of an orphan company when you are listed on an Exchange, it’s bad for your investors, and it’s also very bad for you, because your cost of capital goes up and any future investors will say, I want the liquidity discount.

James West:    So how do you generate liquidity for corporate entities?

Jos Schmitt:   So we really re-established a concept that kind of disappeared in our world, and that’s a concept of designated market-makers. So those are entities that have a role and a responsibility to provide liquidity in a stock, support that stock, and there are a certain number of advantages that they can benefit from to fulfil that role. And that entire concept of market-maker, I would probably say in the last 5 to 10 years, kind of disappeared out of our world, out of the Exchange world. And I think that the Exchanges took that vision that, you know, who needs market-makers, with all the problems that they always cause, when you have high-frequency traders?

But they forgot that what they fundamentally missed is that many of the high-frequency traders that were that, that were emerging at that moment, were very opportunistic. So they are there when it works for them; they are not there when you need them.

James West:    Right. And they ultimately drive up the transactional costs for both the companies and the investor because they’re essentially inserting a very micro-fee and making the buyer pay more, the seller pay more, and trying to intercept that little slice.

Jos Schmitt:   I always define it as ‘unnecessary intermediation’. So they’re creating additional intermediation, you know, where they generate very small amounts, but they repeat it on a continuous basis, and that’s a form of tax, I would almost say, on the investor community. That is what we seek to avoid.

James West:    Sure, yeah. So then, in terms of visibility for the corporate entity and generating, you know, order flow from genuine investors, be they institutional or retail, how does NEO project itself into the retail investor community and into the institutional investor community?

Jos Schmitt:   It’s two different communities, of course, as you know very well. I think on the institutional side, you know, I always look a bit at the Exchange and all the various layers of other actors and stakeholders that we interact with. The institutional community is a well-defined, reasonably well-known community, and we interact pretty much directly with them, and we explain them what we do, how we work, how we operate, what their benefits are, you know, when their orders are being handled on our Exchange. Or, we can also reach out to them or establish relationships eventually with someone who wants to list with us. So you know, those are the kinds of services that we give.

And I would say that that interaction, of course, becomes easier and easier. Because at the beginning, when you set up an Exchange like NEO, you know, it’s a story. Now we affect – it’s quite interesting, we now represent about 10 percent of all volume traded in Canada, after two and a half years of operations. And when you look at the volume trader, about what I would define as the opportunistic HFT- HFT, represents less than 5 percent of our volume. Compare that with 40-50 percent on any new marketplace or Exchange initiative that I have seen in the last 30 years in the world; compare it to probably 30, 40 percent with the established Exchanges, that’s the type of activity you see.

So the model works, and we can tell them that, and that helps a lot.

On the retail side, I think it’s all about, you know, leveraging certain channels, certain market data distribution channels, certain organizations that really communicate with them and that can be, as I said, from a market data perspective but also be blogs or discussion forums. We are looking at leveraging that to create that awareness, make people aware.

We, of course, leverage the entire distribution channel that we have, or the access points that we have. So every dealer in Canada is connected to us; the discount platforms are connected to us, the investment advisors are connected to us. So everyone can see our data, can have access to our market, and our role is to further amplify them. And how do you amplify it? I gave you a couple of examples, with specialized forums or with market data, but it’s also making sure that we have a good social media presence. It’s making sure that when there’s a major event, we talk with more classical media, and we also do some advertising in the right places.

James West:    Okay, great. Let’s leave it there for now, Jos. We’ll come back to you in a couple of quarters’ time, if not sooner, and we’ll have this conversation again and see how you’re doing. Thank you for your time today.

Jos Schmitt:   Sounds good. Thank you very much. Much appreciated.

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