UPDATE 1-Royal Bank, others plan new Canadian stock exchange
* Aequitas takes aim at high-frequency trading
* Expects to launch late next year
* Would directly compete with TMX Group
TORONTO, June 25 (Reuters) - Canada's largest bank and some of its most influential fund managers plan to set up a new stock exchange to challenge the dominant TMX Group Ltd, one that would limit the role of controversial high-frequency trading firms.
The new exchange operator, Aequitas Innovations Inc, will be backed by Royal Bank of Canada and other institutions not involved in the 2012 takeover of TMX, which operates the Toronto Stock Exchange.
Its founders said on Tuesday that the new exchange, expected to launch in late 2014, will cater to retail and institutional investors who they believe have been short-changed by predatory high-frequency trading practices.
High-frequency traders use sophisticated algorithms to trade thousands of shares in a millisecond with the aim of earning a profit from market making and price imbalances. But many players, including some large fund managers, have criticized their impact on markets.
"I would call it a grassroots reaction from some key market stakeholders saying we need choice, more choice in the marketplace," said Jos Schmitt, chief executive officer of Aequitas, who headed TMX rival Alpha Group before it was taken over by the larger exchange operator.
Once launched, Aequitas would be a direct competitor to the TMX Group, which also operates Canada's main small-cap and derivatives exchanges. TMX handles roughly 80 percent of equity trading by value in Canada.
TMX is controlled by a consortium of Canadian banks and other financial institutions that thwarted a takeover bid by London Stock Exchange Group. The consortium, known as Maple Group, then combined the Canadian exchange operator with Alpha and a trading clearinghouse.
RBC, the country's biggest lender, was one of the few Canadian banks not involved in the consortium, as it had advised the London Stock Exchange on its bid.
In addition to RBC, Aequitas is backed by Barclays Plc , Canadian mutual fund managers CI Financial Corp and IGM Financial Inc, pension fund PSP Public Markets, and Investment Technology Group Inc.
"This is the first marketplace in existence that has more investors around the boardroom table than it does brokers," ITG Canada's CEO, Nick Thadaney, said in an interview.