EDITORIAL PAGE The wasted potential of COATS

The transfer of authority for Ontario’s over-the-counter securities market from the Ontario Securities Commission to The Toronto Stock Exchange dooms unlisted stocks in the province to a feeble market system that will never fully realize its potential. As long as COATS (Canadian Over-the-counter Automated Trading System) behaves like a poor cousin, the TSE is likely to treat it with the same benign neglect that marked the OSC’s stewardship. COATS will never be able to spread its wings and see what is really possible for an unlisted market while its caretakers are burdened with conflicting responsibilities.

It could be that COATS would simply fall flat on its face should it ever try to spread its wings. Perhaps no amount of support from the OSC, the TSE or anywhere else could invigorate COATS. After all, no one has ever shown much interest in adopting this orphan.

But COATS has never been free to discover what it could do. The OSC has been a well-intentioned guardian, but the OSC’s true mandate is market regulation. It never was able to vigorously promote the unlisted market and probably shouldn’t have been expected to do so.

It is hard to imagine how the TSE is going to be any better for COATS. The TSE has the equipment to do the job and its staff is certainly capable of handling the work — it’s not as if they were overloaded these days. The question is: what kind of direction will they be given by the TSE’s board of governors.

Few consider COATS a serious competitor to Canada’s largest stock exchange. Total value of trading on COATS in 1990 slipped to $382 million compared with the TSE’s $64 billion.

But competitors they are. Both are in the business of facilitating trading in securities such as stocks and warrants. Both maximize revenue by maximizing trading, and in this moribund market brokers are fighting for every trade there is.

So it is difficult to see how the TSE’s member firms — the brokers — will divvy up the trading action. It is doubtful that the TSE’s governors will make any strong efforts to increase the volume or value of trading on COATS. That would simply not be in the best interests of the TSE’s already suffering members.

It may be argued that a TSE subsidiary, the Canadian Dealing Network, is taking over responsibility for COATS and, therefore, if the subsidiary prospers, the TSE will ultimately benefit.

CDN, however, has been set up as a non-profit corporation. That sounds as if the object of this exercise is to let COATS die a slow death, or at best, survive with whatever trading leftovers the TSE does not care to pursue.

Some will say that COATS has never been able to generate sufficient business to warrant efforts to keep it afloat. We disagree. There is a need for a trading system like COATS, a system that is less formal, less “clubby,” than the TSE.

Like the “farm” systems in professional sports that develop young players until they are ready for the big leagues, markets like COATS are a place for young companies to raise capital, particularly higher-risk capital.

In the future, the globalization of capital markets could see exchanges like the TSE decline in importance. The TSE has tried to skim the cream of the securities crop in Canada by being the country’s most regulated, most senior, most blue-chip of exchanges. It has succeeded. But today, for those who seek a liquid market in highly capitalized stocks, it is almost as easy to push a button and deal directly with New York, London or Tokyo.

It could be that the future of Canadian securities markets lies in developing a strong regional appeal or developing a niche market that others are reluctant to enter. The Vancouver Stock Exchange, battered as it may now be, has carved out such a niche as North America’s venture capital market. COATS might follow a similar strategy while leaving the TSE to slug it out with the world’s other great financial markets.

This transfer of responsibility and operating authority of COATS from the OSC to the TSE is likely to thwart that potential. If so, Ontario’s entire financial industry will be the poorer for its inability to foster a true junior market for the formation of capital.