The NEO Exchange: Challenging the "TSX Monopoly"

The NEO Exchange is a new Canadian stock exchange that’s looking to leverage technology and market structure innovation with a trading platform driven primarily by fairness. Its overall goal is to put investors, companies and dealers first, and in doing so, challenge the current “TSX monopoly.”

To learn more about the exchange and what it offers to investors, the Investing News Network (INN) spoke with President and CEO Jos Schmitt. In the interview below, he outlines the issues he sees with TMX Group (TSX:X), how he sees the NEO Exchange addressing them and what the exchange has accomplished so far. Read on to hear his thoughts.

INN: The NEO Exchange is looking to challenge the “TSX monopoly.” Can you start by describing the problems you see with the TSX? Why does it need to be challenged?

JS: After the Maple transaction in 2012, we moved back into a real monopoly. All trading, listing and market data was again within the hands of one organization not necessarily with the best track record. The questions we asked ourselves were, “do we need to do something about that? Do we need competition?”

In terms of trading, what we saw with TMX Group was the development of a nefarious strategy based on supporting high-frequency traders and not doing anything to tackle the types of trading strategies seen in the book “Flash Boys,” and which are also common practise in the Canadian market.

On the listing side, what we saw was an organization that was more focused on bringing companies to a public listing than on making sure that they were ready for public listing. If you look at the public listings in Canada on the TSX and TSXV, you see that all the activity is concentrated in about 260 securities, including ETFs. All the other ones are suffering liquidity issues, and I think for two reasons: a substantial number of them went public too early, while other ones that are probably at a good stage, but lack liquidity.

From a market data perspective, we saw that Canada was one of, if not the most, expensive in terms of accessing real-time market data, and that has very, very worrisome consequences. One is that people trying to save costs are put in a position where they’re not making the best investment decisions. Another is that a lot of public companies don’t see their full activity being promoted to investors.

All in all, we saw a trading space that was becoming more and more an unleveled playing field. Those three elements pushed us to believe that we needed a different exchange, an exchange not driven by short-term profitability. That was our entire vision, and we believe that if we do the right things, if we do what is right for investors from a trading perspective, a listing perspective and a market data perspective, then we will become a successful company.

INN: You’ll of course be looking to address those issues with trading, listing and market data with the NEO Exchange. Can you start by telling me how trading and listing work?

JS: Trading and listing are two different things. We are trading everything that is listed on the TSX and TSXV, everything that is publicly listed in Canada.

The listing offering is something that we made available quite recently, and I hope we’re going to see our first public listings come in very soon. If you are a corporation that wants to list with us, we give you a number of standards that you can use. One involves net income, among other things — if you make a net income of at least $700,000 a year, then you can go public on our market.

If you are not generating any net income, you have to have a substantial market capitalization — $50 million. We give different options because different companies have different needs. You can come in under the net income standard, or under the market capitalization standard and we also have a third option.

We will not list venture companies. That is an important statement to make. I think with a number of exceptions, many of them probably should not have gone public. It doesn’t mean we ignore them, because we do believe that small- and mid-cap companies need to have access to funding and capital — that’s a big issue in Canada. For them we are in the process of building a private securities platform, a totally new concept. It will be a custom-made solution for small- and mid-cap companies that need funding, but are not ready to go public.

INN: That sounds fairly restrictive. What motivated those stringent listing requirements?

JS: In Canada today we have 3,500 public listings on the TSX and TSXV. Typically the ratio that we take when we look at the economies and capital markets [of the US and Canada] is 1:10 — if it’s one in Canada, it’s 10 in the US. So you would expect 30,000 to 40,000 public listings in the US. But there are only 8,000 in a market that is 10 times the size of Canada’s. That shows you there’s something wrong in our approach here.

I’d be very happy with 400 public listings. I don’t need 3,000 or 4,000. Four hundred good listings — that is how you add value and build investor confidence.

INN: And what is the NEO Exchange’s approach to market data?

JS: We take a very interesting approach. When you want to look at market data on the NEO Exchange and you’re a retail investor, you pay no fees, zero. We want to make data accessible in an easy way. So whether it’s our own listings that are traded, or whether it’s listings on the TSX or TSXV, we will not charge any fee for retail investors. We want to make sure they are informed and have access to quality information.

INN: Who can access companies trading on the NEO Exchange? Can investors outside of Canada do so?

JS: Absolutely. You just need to go through a registered dealer. One of the objectives with the platform is to leverage the Canadian reputation to bring in investors from abroad, and definitely investors from the US. I think there’s a lot of interest. We sense a lot of interest in the US in solutions of this nature being established in Canada.

INN: So far what practical implications has the NEO Exchange had for retail and institutional investors?

JS: We launched our operations at the end of March, and in mid-May started trading all TSX- and TSXV-listed companies. We now have a market share of between 4 and 5 percent, which is quite nice in a fairly short time.

We are evolving and improving, and giving investors an environment where they know that there’s a lot of mechanisms in place that prevent predatory strategies like high-frequency trading — we’re not trying to enable strategies that are detrimental to the long-term investor. They also see that we have re-energized the concept of market makers, or parties that are committed to providing liquidity to securities.

Investor confidence is still very low, and there’s still a lot of distress; I think if we can change that and give investors a level playing field from a trading perspective, that’s going to be a step forward.

INN: Is there anything else you’d like to add? What’s next for the NEO Exchange?

JS: We are trying to be at the forefront of innovation and are coming up with solutions to issues that are presented to us. For example, we announced last week a solution for more efficiency and reduced costs in accessing actively managed mutual funds. From the end of January to early February we will make a technology platform available that is outside of our exchange where investment advisors will be able to buy and redeem vouchers and redeem mutual funds much more efficiently than they can today.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.