Investors and public companies are losing confidence in the ability of the public equity markets to fulfill their role of capital formation and liquidity, according to Jos Schmitt, CEO of Aequitas Innovations.

“If you look today at the way the industry and the equity markets are being perceived by investors, it’s not a pretty picture,” Schmitt told Markets Media. “Retail investors are saying markets are stacked against us and institutional investors are saying that investing is no longer about making the right investment decision but being the first one to reach the market place.”

Schmitt will be speaking at Markets Media’s Global Markets Summit London on Oct. 16.

The primary issues are liquidity and transparency, according to Schmitt. Liquidity is concentrating in an ever-declining number of securities, which are typically large cap listed companies and a number of ETFs. “If you look at the entire high-frequency trading world, their focus is mainly on those types of securities and they are not interested in securities where there is a structural lack of liquidity,” he said.” They have been crowding out true market-makers who used to be liquidity safety nets in less liquid securities.”

The Aequitas Neo Exchange market structure includes a smart order router and four separate trading books – Lit Book, Neo Book, Dark Book and Crossing Book – designed to improve the execution quality for investors and align interests with the interests of dealers, according to the company’s regulatory filings.

In Canada, there are about 5,000 listed companies, but most of the trading is taking place in only about 250 of them. Over time, the more actively-traded companies slowly disappear, through mergers and acquisitions or other reasons. “We see the number of liquid actively traded companies continuously reduced,” said Schmitt. “It also impacts issuers, because the benefit of going public is not there anymore and you create a vicious circle.”

On the transparency side, investors need to be confident about what is happening with their orders, and they need to have information about how orders are being handled. “In today’s world, there’s a total lack of transparency around that and we need to figure out a way and make sure to bring marketplaces – exchanges, dealers – towards explaining how they route their orders.”

Broker dealers, he added, “don’t necessarily want to explain that they route their orders to where they get the most beneficial treatment from a fee perspective. But I think that should be public and then people should be able to make their decisions.”

Lack of transparency also surrounds market data fees. In Canada, said Schmitt, a form of monopoly on the marketplace exists “in the sense that the market data is extremely expensive which means that the vast majority of people who invest and trade only have access to one set of data. If you want to have a consolidated view in Canada on the markets, you need to pay fees and it becomes exorbitant, and it’s a problem I also can see in Europe. We need a way for investors can have access to information in a fair way and feel comfortable about what’s happening in the market.”

Featured image via iStock