MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING MONDAY, APRIL 13, 1998 (2)
MARKET WATCH, Con't
TSE Battles Computer Bugs
Priority Is 2000 Problem; No Date Set For New Trading System
The Globe and Mail
The Toronto Stock Exchange is spending $20-million to make its computer trading systems ready for the millennium by the end of this year, president Rowland Fleming says.
But as it prepares for the millennium bug before New Year's Day 2000, the TSE has the twin task of replacing its aging patchwork of trading systems -- which has earned it a reputation for missing deadlines and not delivering on its promises.
The exchange is well behind schedule in introducing a state-of-the-art electronic trading system, and industry players accuse it of not keeping them adequately informed about the situation.
While they wait, frustrated traders have to make do with an upgraded version of a 21-year-old computer system that was not designed, initially, for trading.
Mr. Fleming acknowledges that the 2000 problem is an area in which the exchange cannot afford to make mistakes. All of its trading is now automated, so Canada's premier stock exchange will effectively shut down if the systems are not ready to read Jan. 1, 2000.
"We're deadly serious about doing whatever it takes to make sure that the exchange will operate effectively through the year 2000," Mr. Fleming said in a recent interview.
But he must convince the brokerage community that the TSE is up to the dual task of dealing not only with the millennium bug, but installing an adequate trading system.
Mr. Fleming concedes that the TSE got a late start addressing the millennium issues, because management has been preoccupied in recent years with developing a new electronic trading system. Many members of the brokerage industry blame exchange management for the problems, which began well before Mr. Fleming's arrival three years ago, but continue under his reign.
The central problem is that the exchange's computerized system is slow and not always reliable.
"That's why the TSE in the eyes of its members lacks credibility," said a brokerage executive who asked not to be named. "People have long memories."
The system should be able to transmit buy and sell orders instantaneously, said Peter Erglis, a trader at McDermid St. Lawrence Securities Ltd. But when it is forced to deal with large volumes of trading orders, there can be delays of up to 15 minutes between a change in a stock's trading price at the exchange tower and the price quoted on traders' computer screens at downtown brokerages.
On those occasions, Mr. Erglis said, "you're expecting [a trading order] to flip into the marketplace and it just sits there and sits there."
Another trader said the system handles large volume orders fairly well. But the slow response time is frustrating for market-makers, specialists who typically trade small volumes of a handful of stocks, because they must nimbly and quickly respond to market changes.
"This thing has plodded on and on and on," said Fred Ketchen, managing director of equity trading at Scotia Capital Markets. "This is like a 108 year old person still going to work every day. It may be held together with duct tape and bandages, but it shows up."
The TSE's computer problems date back to the late 1980s, when it began trying to develop an electronic trading system that would allow it to close its trading floor.
The exchange's board of governors voted in 1991 to make the exchange fully electronic. But plans to close the floor were delayed for several years as the TSE fought with floor traders who were worried about losing their jobs, and as it tried to develop a trading system in-house.
Two years ago -- after spending $35-million and more than a half-dozen years on the ill-fated project -- the TSE scrapped the attempt to create its own computer trading technology.
It then started a new project, by purchasing trading technology from the Paris Bourse. The plan was to develop a brand-new computer trading system called Torex (a combination of the words Toronto and exchange), to build on the Paris technology platform with customized software to be written by IBM Canada Ltd.
With the new Torex system under development, last April the TSE finally closed the trading floor, where traders had gathered for decades to buy and sell securities. At that time, about half the stocks were listed on its floor-trading system, which handled most of the volume.
The remaining trades took place on its existing computer assisted trading system, known as CATS. The TSE replaced the floor with an enhanced version of CATS so it could handle all exchange listed stocks. But that was supposed to be an interim measure.
The exchange had planned to replace CATS with Torex by the end of last year. But it missed that deadline because there were several problems with the new system.
The Torex system consists of computer work stations designed to link traders in brokerage firm offices with the TSE's trading engine, which processes records and monitors trades. While hundreds of Torex terminals are already installed in traders' offices, the exchange is still using the old CATS technology as its interim trading engine. CATS was never designed as a trading system when it made its debut back in 1977 -- it was meant to function as an electronic warehouse for non-active TSE stocks.
Mr. Fleming makes no promises about when the new Torex system will be fully implemented. He said the first priority is to address the millennium problem by the end of this year. At the same time, the new Torex system will be tested during the summer and fall. In the event that Torex is not ready in time for the millennium, the exchange is working on making both CATS and Torex year 2000 compliant.
The exchange has retained IBM Canada -- which is already designing the software for the Torex system -- to audit progress on the computer system to ensure that everything is on track with the year 2000 plans, he said.
The TSE must have its 2000 bugs ironed out one year in advance, because the system must be able to handle so-called "good -'til -cancelled" orders by Jan. 1, 1999 -- orders that can expire within one year of being placed.
"I'm not sanguine at all, but I do have a comfort level that our plans are very precise," Mr. Fleming said. "They've been well developed in an enormous amount of detail."
As the brokerage industry anxiously awaits the outcome of these plans, Mr. Fleming is being criticized for making decisions without following the exchange's tradition of relying on input from committees made up of TSE staff and brokerage members, industry sources said.
And while Mr. Fleming said there is "a very close continuous dialogue" between the exchange and the management of the member firms, others fault him for not keeping the industry better informed.
"We are the proverbial mushrooms right now," said McDermid St. Lawrence's Mr. Erglis. "Anything the TSE tells us is long on rhetoric and short on detail."
Members of the exchange's board of governors also would like Mr. Fleming to keep them better informed, said Daniel Sullivan, vice-chairman of the board of governors and deputy chairman of Scotia Capital Markets.
"Most organizations can improve their communication with their stakeholders," he said. "The TSE is no exception."
Annual Meetings Where The Action Is
Calgary Herald
Annual meetings may be a necessary evil for corporate executives, but they offer shareholders a golden opportunity for an inside peek at how companies are being run.
For that reason alone, say financial experts, annual meetings are worth attending.
"If you really want to know what is happening with your investment, then the annual meeting is the place to be," says Paul Ziff, president of the Ziff Energy Group and a former financial analyst.
"It's the one chance ordinary shareholders get to ask whatever they want of company management -- and you never know what you might hear."
Or in some cases see.
At the annual meeting of Alberta Energy Co. Ltd. this past week, president and chief executive officer Gwyn Morgan introduced Gumby, the 1950s cartoon character who has been adopted as the company's "stretch target mascot" (a motivational tool aimed at getting workers to better their personal goals) to a smiling audience.
As the meeting unwound, neither Gumby nor the company's officers on hand faced many questions.
That's no surprise to Ziff, who says Canadians tend to be unduly shy about taking an active role at annual meetings.
"In the United States, the meetings are much more interesting. Things really get going -- especially if people are unhappy with the way in which their companies are being run."
With annual meeting season now in full swing -- because of corporate and legal reporting requirements for companies with Dec. 31 year ends April and May are prime months for annual meetings -- Calgarians are again weighing the pros and cons of heading off to company offices and hotel meeting spaces where annual meetings are traditionally held.
In the past, the opportunity to hob- nob with company officials and perhapsm garner a free lunch along the way has served as an attractive inducement for many shareholders.
And while companies are still given to setting out buffets or snack tables for shareholders, a growing emphasis on corporate fiscal responsibility has meant that more and more annual meetings are turning into austere affairs.
That was obvious at the Toronto Dominion Bank's annual meeting, held this year for the first time in Calgary.
Along with the prerequisite speeches and testimonials from company officials, shareholders were treated to a meagre display of coffee, tea and cookies. The message from bank officials was implicit: we are not an extravagant organization. We will not waste your money.
Nonetheless, shareholders in attendance applauded wildly when one of their number inquired whether lunch would be served.
On the other hand, corporations like Calgary based Alberta Energy Co. are still choosing to fete and treat shareholders when celebrating a good year.
This past week, company chairman David Mitchell invited the 400 or so attendees at the AEC annual meeting to partake of a mouth-watering finger sandwich and desert buffet after the meeting's official business had been concluded.
John Barth of the Canadian Shareholders Association says annual meetings offer investors and potential shareholders a good chance to see if they are in sync with a company's corporate culture.
"Sometimes it's important for your peace of mind as an investor to get a sense of whether a company is extravagant or cost-conscious. And certainly you can get an idea of that from attending the annual meeting. "
Annual meetings can also provide shareholders with a window onto how corporate management views the world.
"You can always tell what management has in mind by the way they set up for an annual meeting," says Keith Davis of Media One Communications.
"If they are open to discussing things with shareholders, there will be microphones around the room and an informal setting. The more formal the setting, the less interested they are in a two-way dialogue."
Shareholder activists argue that annual meetings are the only venue in which company executives are truly accountable.
"I think companies would make fewer big, dumb, expensive mistakes if shareholders were more demanding," says Bob Verdun, a longtime shareholder activist who believes that shareholders have a duty to attend annual meetings.
It's the only way to keep the companies honest, he suggests.
Verdun maintains that "there is a little bit of Bre-X in every company and that corporate executives often want to do things without the shareholders knowing about them."
Bre-X was the Calgary-based gold exploration company whose shares traded atmore than $200 each before an audit of the company's Indonesian gold mines revealed there was virtually no gold on the site, a revelation that caused the company to collapse.
Shareholders across North America lost billions of dollars in that collapse.
Verdun notes that annual meetings also are one of the few places where shareholders can get to see company executives in action -- and in the process make at least a cursory assessment of their abilities.
That includes their character, he adds.
"Everyone I know tells me that you should look at a company's management before putting your money into their shares. Well, this is one place where you can see if they've got what it takes to handle what can be a challenging experience."
Annual meetings also offer perceptive investors or shareholders the chance to learn things about a company before they become common knowledge -- a scenario that can translate into windfall profits or important savings for investors who are quick off the mark.
"If a company talks about an important initiative one year and doesn't mention it the next, it could be a sign that something is amiss," warns Ziff.
Ziff says he has known shareholders who attended annual meetings and were so upset by what they heard that they called their brokers from the hotel lobby and ordered them to sell off their shares before the bad news they had heard hit the market.
"You don't have to be a financial analyst to benefit from what you will hear at an annual meeting," says Ziff. "The common-sense principle applies. If you hear something that doesn't make sense to you, it may not be you that is wrong.
"Company executives are not all-knowing. And the more you know about what they are doing, the more informed decisions you can make."
Quick Facts
Five reasons to attend annual shareholder meetings:
- They offer the opportunity to see company executives in action.
- Shareholders can see firsthand if they feel comfortable with a company's culture or values.
- They provide an opportunity to glean new and potentially lucrative data about the company.
- They are a good place to compare notes with other shareholders.
- You might get a free lunch.
Quarterly Snapshot TSE Price-To-Book Ratios
A snapshot of TSE price-to-book ratios over the most recent calendar quarter can be found at canoe2.canoe.ca
Quarterly Snapshot: Earnings Estimates For Toronto 35
canoe2.canoe.ca
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