Marriage of stock markets proposed — Merger to create more competitive trading network

The amalgamation of Canadian financial markets is expected to create a leaner entity capable of competing more effectively in the global arena.

Under an agreement-in-principal, stock exchanges in Toronto, Vancouver, Montreal and Alberta will restructure into a single unit with regional offices specializing in a particular aspect of the broader Canadian market.

According to the proposal, Toronto will become the sole senior equities exchange; Montreal will become the centre of options and futures trading; and the Vancouver and Alberta exchanges, as well as the TSE-run Canadian Dealing Network, will combine to serve the junior equities market.

The proposal has yet to be approved by the respective exchange commissions and the Quebec government, and is not expected to be implemented for about a year.

At present, it is unclear how the Vancouver and Alberta exchanges are to be merged.

Companies that qualify as juniors on the Vancouver, Alberta and Montreal boards will be listed on the new junior exchange, the proposed centre for Canadian venture capital equities. As yet, the new exchange is unnamed, and neither the VSE nor the ASE has said where the head offices will be situated or how much each exchange would save as a result of the merger. The Winnipeg Stock Exchange, which hosts 90 public firms, was invited to join the VSE-ASE merger. Regardless of where that exchange is based, it will maintain offices in Toronto and Montreal.

The changes are aimed at creating a leaner Canadian capital market with a greater presence on the world stage. In its current state, Canadian markets account for just 2% of international trading.

Last year, the TSE, which lists 1,430 companies, accounted for 90% of all trading in Canada, with more than 26 billion shares worth $490 billion changing hands.

At the Montreal Exchange, trading in 570 companies reached a volume of 3.5 billion valued at $55.7 billion, while on the west coast, trading in 1,373 VSE-listed companies hit 2.1 million shares valued at $8.9 billion. Three billion shares of 1,030 companies listed on the ASE were worth $1.8 billion.

In addition, the merger will allow exchanges to trim operating costs by pooling resources and technology. For example, the TSE’s new electronic derivatives trading system will be transferred to Montreal.

Public companies are expected to benefit from the elimination of overlapping fees and uniform regulatory requirements, whereas member firms will be able to cut operating costs.

Initial reaction from the financial sector was positive. A west coast mining analyst, who asked not to be named, said the location of exchanges is irrelevant in the age of electronic trading. “[Traders] need a computer screen and a telephone, that’s it,” he said, adding that the merger would make the Canadian financial sector more efficient and focused. “It will create a more stable market, with listed companies under one dome.” Regulators seem supportive as well. “In light of the changing global market environment, we support steps by the Canadian exchanges to improve their competitiveness,” states the British Columbia Securities Commission in a release. “Of course we will examine the specific proposal . . . to ensure that the interests of the public and investors are safeguarded.” The Quebec provincial government has formed an advisory group to study the proposal and will submit a report by April 30.

The next step is for the exchanges to form “transition teams” to evaluate all aspects of the merger and create a schedule for implementation.