EDITORIAL & OPINION — Making a de facto national stock market — Now it’s government’s turn

Say what you like about this country’s stock exchanges, they have an instinct for timing. The reorganization and rationalization of Canadian capital markets actually managed to take some people by surprise.

The reforms — and there is no question, they are reforms — will see the Toronto Stock Exchange take over as the single market for senior equities. Wherever a company is listed now, if it meets the current standards for listing on the TSE it will move there. The Montreal Exchange, which has developed over recent years into a hybrid, trading senior and junior equities plus a number of derivatives, takes over as the national derivatives exchange, trading options and financial futures.

What this has also done is give the two senior exchanges a chance to do something we suspect the TSE, at least, has wanted to do for a while — ditch the juniors. The effect is to create a two-tier capital market — one for companies with reliable revenues and substantial assets, and another for the companies in resource exploration, technologies, and new ventures that live off the capital they can raise.

Both the senior exchanges will pass their junior listings over to a new national venture-capital exchange. The new national junior market will combine the Vancouver and Alberta stock exchanges and the Canadian Dealing Network quotation system. The Winnipeg Stock Exchange, where a few juniors trade, is being offered a seat on the bus as well.

Civic boosters are already lining up to claim the head office of the new exchange, touting either Calgary’s “Alberta Advantage” or Vancouver’s location on the Pacific Rim, but they will soon see that the location of a national junior exchange will be nearly irrelevant; trades will be executed on a nationwide electronic network, and the new exchange will have storefronts wherever there is business for them. If the cities keep their venture capital companies, and there is no sign they won’t, demand will entitle them to keep their exchange offices too.

The new exchange offers both the VSE and the ASE a chance to get out from under a cloud that has hung over them for some time; many commentators have suggested a new name may take some of the taint of Vancouver’s bad old days and Alberta’s recent misfortunes off the Canadian ventures market. This will only work, though, if the exchanges and the securities commissions sharpen their surveillance and enforcement habits: we promise more on this subject next week, but we can say one thing about regulation of the junior exploration companies now. The new Canadian Venture Exchange will have its pick of the reporting standards developed by the exchanges, and it should choose the tightest ones in all cases.

That the CDN will continue to be a quote-driven market rather than a true auction exchange is less than ideal, yet it is probably the only realistic goal for now. Individuals who buy shares in tightly held CDN-quoted companies place themselves in the hands of market-makers and large shareholders now, in any event, and the liquidity needed for a full-scale auction market won’t be created overnight.

It certainly does not look as if any of the existing markets are being displaced, even though the Quebec nationalist press shuddered over the “marginalization” and “amputation” suffered by the ME, and saw Montreal contenting itself with “crumbs tossed our way by the Toronto masters.” The ME, on the contrary, has seized one of the tastier rolls at the table: the national franchise on derivative securities (the same sophisticated market segment that has made Chicago a power in the U.S. financial industry). That was no coincidence, the ME having carved its niche in futures and options over the past decade and a half. And it is no tragedy either, because Montreal’s acknowledged expertise and tightly managed regulatory regime should serve the public well in a complex area of the market that needs transparency and clean management to earn the investor’s trust.

The securities industry has managed to look past competition toward co-operation, and may well prove to have done it successfully. These exchanges were never truly “regional” anyway. Each occupied a particular space in the financial industry from which it served the whole country. A new “national” network of exchanges is only another stage in that evolution.

Similarly, the Canadian Securities Administrators, the conference of provincial securities commissions, is developing a uniform national code for securities regulation that could provide a useful boilerplate once the politicians are ready for a national securities agency.

The exchanges and the provincial regulators have done all they can to create a national securities market and a uniform national regulatory scheme. At last, it may be time for national and provincial politicians to design a national securities commission answering to the whole nation through Parliament. But first they will need to put aside their favourite zero-sum game — jurisdictions, available at all fine toy shops and first ministers’ conferences.