The Ontario Securities Commission (OSC) revealed on Thursday it had blocked Aequitas' initial proposal because it restricted access to visible orders, which breaks OSC rules ensuring fair access.

Aequitas is aiming to break the dominant grip of Toronto Stock Exchange operator TMX Group (>> TMX Group Ltd) with a model that limits controversial high-frequency trading (HFT) strategies.

It plans to offer so-called lit and dark markets, as well as a hybrid market combining features of each.

In a dark market institutional investors can trade in large volumes without tipping their hand about pricing by not displaying their orders. More typical and traditional lit markets offer price discovery via bid and ask quotes.

The prospective exchange operator said on Thursday that in response to the OSC decision it would instead make HFT uneconomical via fees and speed-bumps, rather than restrict access outright.

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.

The OSC will seek comment on the amended proposal as part of Aequitas' application for recognition as an exchange, which Aequitas plans to submit in the current quarter. The exchange operator had originally planned to launch by the end of this year, but now hopes to roll out its service in the first half of 2015.

Aequitas has previously said it would shy away from a now-common fee structure in which one side of a trade - often an algorithmic trader - receives a rebate for placing an order. Exchanges often cover this cost with higher fees on the other side of the trade, in many cases retail or institutional brokerages.

Aequitas is backed by Royal Bank of Canada (>> Royal Bank of Canada), Barclays Plc (>> Barclays PLC), pension fund OMERS Capital Markets, mutual fund managers CI Financial Corp (>> CI Financial Corp) and IGM Financial Inc (>> IGM Financial Inc.), telecom company BCE Inc (>> BCE Inc.) and others.

TMX is controlled by a consortium of Canadian banks and other financial institutions that thwarted a takeover bid by London Stock Exchange Group (>> London Stock Exchange Group Plc). The consortium, known as Maple Group, then combined the Canadian exchange operator with the smaller Alpha exchange 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.

(Editing by Jeffrey Hodgson and Rosalind Russell)

By Alastair Sharp