Guest Column (November 04, 1991)

In my early trading youth in the U.S., a company that successfully climbed the corporate ladder would follow a definitive path in the trading of its securities.

When it first went public, it would be traded in the over-the-counter market. The firms involved in the original distribution would agree to make a market OTC, almost as a part of their underwriting commitment. If the stock became a successful trader, other firms, not involved in the underwriting, would register as an OTC Dealer.

In those days, a company would list on an exchange as soon as it met the criteria for listing. First it would list on an exchange in its geographical region — California, New England, the Midwest, Philadelphia. If the company got even bigger, it would list on the American Stock Exchange. If it made it, the final rung on the ladder, the New York Stock Exchange.

The underlying assumptions were that while a company was small, the trading in the stock needed the support of OTC market makers, but when it got to a critical mass of shareowners and prospective shareowners, the critical benefit of listing, the ability of a shareowner to sell directly to a public buyer, without the imposition of a dealer, should be available. This assumption was blown apart by an aggressive national association of securities dealers — the NASD. They seemed to be fighting the battle of off-board trading rules, and the exchanges fought them on this battlefield. What it took a long time for those exchanges to realize was that the real battle was going on in corporate board rooms. Once NASDAQ came up, and at least some quotations were being displayed electronically to at least some other people, the NASD began a marketing campaign with their larger companies, arguing that they should not list, but stay in the electronic OTC market.

The NASD market campaign was successful enough that many companies that met even NYSE listing standards remained in the OTC market. The U.S. exchanges had come to fully realize, at about the time I moved to Toronto, that the battle was between the OTC and the listed market for listings. Now imagine my surprise when I first got there that the OTC market in Ontario — the Canadian Over-The-Counter Automated Trading System (COATS) — was run by the Ontario Securities Commission. All I could think of was the old Latin phrase: “Who’s watching the watchers?”

With my TSE hat on, one of our goals is to ensure that the TSE list remains the pre-eminent list of Canadian Securities. When the OSC first suggested that we take over COATS, we declined on the basis that it would be difficult to distinguish between TSE-listed securities and COATS securities, if they were both run out of the TSE. Despite this seemingly flawless argument, the OSC came back and asked us again to take it over, and the TSE board concurred. I believe that we have achieved the goal of a transfer without any disruption. The trading has been, as far as we can see, normal. Dollar value traded, through September, is about flat compared with the similar 1990 period, which is consistent with TSE statistics. Volume is running about 1,100,000 shares per day.

Our goal is to improve the quality of regulation and surveillance so as to develop a more credible market for junior issuers that do not meet TSE listing standards in Ontario.

On the business side, we will continue our goal of running Canadian Dealing Network (formerly COATS) on a break-even basis. As part of our overall 1992 planning, we are reviewing other securities that we may want to trade in CDN, including more foreign issues of high quality. This aspect may be helped by the continuing international discussions by regulators of

multi-jurisdictional questions.