Editorial COATS and the OSC don’t mix

For almost four years now, the Canadian Automated Over-the- counter Trading System has been, in effect, trying to carve out a market niche for itself. When barely one year old, it survived the market crash of 1987, but since then COATS has had a tough time struggling to gain the confidence of investors.

Still, there are indications that this marketplace has something valuable to offer that cannot be found elsewhere in Canada — perhaps in North America. The major stock exchanges have gained hugely during the takeover binge that marked the late 1980s. But those largely unproductive corporate manoeuverings appear to be losing their appeal in the marketplace. As a result, companies of smaller capitalization could be the best performers in the 1990s. COATS could benefit from such a development as a launching pad for tomorrow’s growth companies. It could become the market that offers the greatest potential for capital gains.

COATS has its shortcomings, some of which seriously detract from its appeal to investors. For one thing, it is currently a dangerously thin market. It also suffers from a lack of direction, a result of being administer ed by an organization that would rather be doing other things. It was also gaining a reputation as the “market of last resort,” the place where borderline criminal stock manipulations are conducted under the cover of a regulated market.

The Ontario Securities Commission recently took some decisive steps to halt that dangerously widespread reputation. It has also beefed up the role of market makers in order to improve liquidity. At the same time, the OSC reiterated its desire to “privatize” COATS.

The OSC has never been comfortable with its role as administrator of COATS. After all, the OSC is not in the business of trying to make markets. While it has only formally decided in December to privatize the system, the OSC in reality has been trying to get rid of it almost from day one, preferably turning it over to The Toronto Stock Exchange. The TSE appears to be a logical choice. It has been providing computer services for COATS, has the knowledge of the marketplace and even uses COATS as a “feeder” exchange, a sort of graduate exchange for those who outgrow an over-the-counter market. But the TSE can hardly be expected to have the best interest of COATS at heart. The exchange would like to keep the best issues for itself, an understandable position, but not conducive to establishing a viable over-the- counter market.

There are other possibilities. Some private groups could offer sufficient capital as well as the experienced staff and computer technology to handle COATS. But the OSC is in somewhat of a bind. It wants to be rid of COATS, but it must assure itself and its masters that COATS will be going into good hands. It can’t simply unload the system and wash its hands of the matter.

But there’s no doubt that the OSC is the wrong place for COATS and that new “ownership” could give it a new lease on life. The OSC has done a competent job in establishing COATS’ credentials, but what COATS needs now is the full-time attention of an organization that will go out and market its abilities and features.

There is a future for COATS, and it would be surprising if some entrepreneurs could not take the concept of a junior Canadian stock exchange and sell it worldwide. The opportunities in this evolving global marketplace seem limitless.

Despite the woeful market for junior issues — mining stocks and others — COATS has grown during its first few years. It survived some tremendous market traumas and has served as an efficient market for several issues. Some of those were just waiting for their listing on a more senior exchange — Falconbridge Gold, for example, distributed through a dividend prior to acceptance on the TSE. Others wish to avoid the expense and trouble associated with a listing on the TSE or other exchange. A good example is Britoil, a substantial Glasgow-based oil and gas producer, which has traded on COATS for some time now for that very reason.

An active over-the-counter market could play a big role in helping junior mining companies raise equity from the public. What COATS needs is a champion to battle for a greater market share of junior securities trading.