In this exclusive two-part interview Pat Beechinor sits down with Aequitas Innovations CEO Jos Schmitt to discuss the current state of Canadian equity markets, the challenges facing them and his thoughts on the need for a new and innovative marketplace.
Schmitt feels that the evolution of capital markets over the last decade is responsible for many of the problems today.
“[Marketplaces] today are mainly driven by the returns that they can provide to their own shareholders,” says Schmitt. “[They] have lost sight of what I believe their fundamental purpose should be- bringing investors and issuers together in the most efficient way.”
Many of Canada’s largest banks agree with Schmitt- RBC, Barclays and others are leading a group of investors to launch this new stock exchange.
Schmitt believes there are two main issues that need to be addressed: 1) the negative impact of high-frequency trading (HFT) and 2) companies going public who are not prepared to do so.
AUDIO: Part one of the interview
High-frequency trading generates substantial revenue for stock exchanges, most of which are publicly traded themselves and have their own shareholders to report to each quarter. Hence, exchanges have not been shy to accommodate HFT and even provide rebates to them for creating liquidity.
However many investors, both large and small, believe HFT creates an unfair marketplace where high-speed trading receives priority over institutional and retail investors.
Aequitas has vowed to restrict HFT and bring back the long forgotten market maker, who has been squeezed out by HFT over the last decade.
Schmitt believes this shift in focus back to the market maker will “put the long-term investor first and protect them from those inappropriate behaviors of HFT.”
AUDIO: Part two of the interview
Well known resource investor Eric Sprott agrees with Schmitt’s view. In a July 17th editorial by Jennifer Kwan of Canadian Business, Sprott was quoted as saying: “I think high-frequency trading is devastating for normal investors. Every day we lose value to high-frequency traders who serve no purpose in my mind.”
The second issue Aequitas plans to address is the surge of companies going public well before they are ready to do so. Schmitt believes this trend has set many early-stage companies up for failure.
Nowhere else is this more apparent than the junior resource sector. Previously, the ease with which exploration companies could be formed, go public and raise capital made for a situation where the process was not questioned.
A new reality has set in however. In the current environment where access to capital has dried up, the future of many junior mining companies remains unclear due to their inability to handle compliance costs associated with being a publicly traded company.
Of those who have been able to raise capital, the cost has proven to be highly dilutive to shareholders. In many cases the cost has been so high that companies have simply chosen to wipe out existing shareholders through share consolidations and start over.
Aequitas has plans to provide a private marketplace, which it feels could be an answer to the problems facing many early-stage companies today.
A private marketplace will provide a platform for companies to raise capital and still allow their underlying shares to trade; yet not be subject to the expensive listing fees and disclosure requirements of being a publicly traded company.
Schmitt, who has targeted late 2014 as a launch date for the new exchange, certainly has the credentials to back up his claims. He previously ran the Alpha Group, an alternative trading platform that rivaled the TSX, and at its height accounted for nearly 20% of all trades occurring on the TSX and TSX Venture.
Ultimately, the platform was acquired by Maple Group and eventually merged with the TMX Group and Canadian Depository Services into a single entity.
What, if any, effect a new stock exchange with new ideas could have on the future of the junior exploration model remains to be seen.
However if the current market climate persists, there is no doubt investors, brokers and analysts alike will take a close look at this potential new way to develop early-stage companies.
To listen to this two-part interview hosted by JMN Radio Host Pat Beechinor, please visit the JMN Radio Section of the website.