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How to Avoid Predatory Trading Practices With the Canadian Neo Stock Exchange

How to Outsmart Bullsh*t Trading Algorithms

Written by Jeff Siegel
Posted February 20, 2020

You hear it all the time...

The game is rigged.

And it is.

I don’t care how smart you are or how much research you do, you’ll never be able to compete with high-frequency trading firms deploying predatory trading strategies.

And while I criticize no one for making a buck, there’s something about predatory high-frequency trading that dirties the whole concept of investing. It creates an environment where the intended purpose is not to provide opportunity for public companies and investors to build something of value while creating wealth, but instead, to just rip and run.

Now, supporters of high-frequency trading (HFT) will often be quick to point out that HFT improves market liquidity. And it does when it is leveraged with the right intentions, but what they won’t tell you, however, is that there are also numerous predatory HFT strategies.

One such strategy is where liquidity is only provided for a few milliseconds at a time. This is often referred to as ghost liquidity, which exists when duplicate limit orders are placed on competing venues. Only one will be executed while the others are canceled.

Bottom line: As long as predatory HFT strategies are possible, you will always be at a disadvantage. And while I’m sure there are plenty of high frequency traders who will read this and cry all the way to the bank, there are still plenty of everyday investors who don’t want to risk their cash in such an environment. 

They want to invest in real companies with real value that, over time, will provide solid returns. 

While it’s true that predatory HFT strategies will never go gently into that good night, there is one way to limit your exposure to them.

The NEO Exchange: A Return to Normalcy

The rate of unchecked high-frequency trading on most exchanges ranges from 30% to 60%. You can imagine that a substantial part of this is predatory in nature.

But there is one exchange that averages an opportunistic HFT rate of only 15%.

This is defined as an opportunistic HFT rate because on this particular exchange, HFT flows are subject to trading mechanisms designed to counter predatory behaviors (i.e., a speed bump, a different matching logic, etc.).

So HFT is opportunistic in the sense that it can contribute to market liquidity but is restrained when trying to deploy predatory trading strategies. 

The exchange is called the NEO exchange (NEO), and while still relatively new, it’s been very successful in providing a platform that caters to regular investors and public companies instead of firms deploying predatory trading practices and sketchy algorithms.  

To be honest, it mostly boils down to legitimate liquidity because, as you know, better liquidity (not ghost liquidity) results in lower price volatility, increased investor trust, and lower cost of capital for issuers.

Moreover, for issuers listing directly with this exchange, the NEO does much more to optimize liquidity by...

  • Only allowing the listing of companies that are ready to go public. NEO is a recognized senior exchange in Canada, similar to the TSX, and does not list venture companies like the CSE or the TSX Venture exchange.
  • Operating an innovative exchange-run, market-making program.
  • Making real-time market data easily accessible to all investors globally, and at no cost.
  • Ensuring its trading platform is accessible globally and, where needed, complemented by foreign OTC markets. 

Ethically Driven Wealth Creation

The foundation of the NEO really boils down to fairness, liquidity, transparency, and service — an honorable foundation, to be sure. 

But don’t let the NEO’s high standards of ethics lead you to believe this exchange is just some random outlier of altruism without any credibility...

  • After only four and a half years of operations, NEO represents 12% of all Canadian volume traded in Canadian listed securities.
  • In 2019, IPO financings on NEO reached CAD $1.5 billion, on par with the TSX and well ahead of the Canadian venture exchanges.
  • NEO is closing in on 100 listings including large corporations, such as Columbia Care Inc. (approximately CAD $1 billion in market capitalization); Special Purpose Acquisition Corporations, such as the Subversive Capital Acquisition Corp (an IPO of close to CAD $750 million); and exchange traded funds from powerhouses such as Invesco ($1.2 trillion under management), Fidelity ($2.46 trillion under management), and BlackRock ($7.4 trillion under management).

Other high-quality corporate and ETF issuers on the NEO include:

  • AGFiQ
  • BMO Global Asset Management
  • CI First Asset ETF
  • Halo Labs
  • Horizons ETFs
  • Mackenzie Investments
  • Merida Capital Partners
  • Mount Logan Capital
  • Purpose Investments
  • RBC Global Asset Management

While the NEO may not be as well known as the NYSE, Nasdaq, CSE, or TSX, I believe it represents an ethically driven operation that seeks to bring power back to regular investors and issuers while limiting the negative impact of high-frequency trading.

This is certainly valuable to individual investors but also to companies seeking to go public and deliver shareholder value.

Although the NEO has only been operational for less than five years, I believe its values and core functions will allow it to continue to grow and develop into the kind of exchange that will facilitate a very necessary, ethically driven opportunity for investors to create real wealth and for companies to grow in a sustainable and prosperous way.

To learn more about the NEO exchange, click here.

To a new way of life and a new generation of wealth...

Jeff Siegel Signature

Jeff Siegel

follow basic@JeffSiegel on Twitter

Jeff is the founder and managing editor of Green Chip Stocks, a private investment community that capitalizes on opportunities in alternative energy, organic food markets, legal cannabis, and socially responsible investing. He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks. For more on Jeff, go to his editor's page.

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