Porter:
This article, from the March 2000 issue of Info Systems Executive Magazine, discusses the technology problems faced by the TSE and suggests that the TSE may not survive for much longer.
I had considered buying a seat on the TSE and trading stocks and options from home but after reading this article (and with the recent TSE systems problems) I'm going to stick with my plan of trading Nasdaq and NYSE stocks.
What implications would the demise of the TSE have on the Canadian option market?
I would appreciate your comments.
plesman.com
End Game
Will the Toronto Stock Exchange's technology gamble pay off ? Or will
the investment simply usher in the undertaker?
By Erik Heinrich
Stephen Thompson, CIO of the Toronto Stock Exchange ? Canada's premier
exchange where $525 billion worth of shares changed hands in 1999 ? has his
heart set on publishing the metamorphosis of his company from turtle to hare
as a case study in the Harvard Business Review. If and when that happens, it
will be the ultimate rebuff to all the critics who have predicted the sky will fall on
the TSE.
"I'll get my daughter to write it for me," the 53-year-old Thompson, who is also a
senior vice-president, says half-jokingly. "She's in first-year English at U of T,
and she wants to be a journalist."
The underlying assumption behind this daydream is that she will be a
sympathetic journalist because over the last couple of years the TSE has been
beaten up pretty badly by the Canadian press. Story after story have criticized
the country's biggest exchange for doing too little, too late. Indeed the
exchange's severest critics, inside and outside the media, continue to portend
the demise of the TSE. "You can develop a tremendous argument the TSE
won't be around in five years," says Morgan McCague, vice-president of
Canadian equity trading at the Ontario Teachers' Pension Fund; Canada's
biggest with $60 billion in assets under administration.
Those are fighting words for Thompson, who has been the TSE's CIO since
1998, and whose job is to make sure the exchange has the technological
wherewithal to survive and prosper in the global equity marketplace.
In a nutshell, the TSE's biggest problem is loss of trading in Canadian stocks
that interlist on big U.S. exchanges, namely the New York Stock Exchange
and Nasdaq. At last count, about two-thirds of the companies on the TSE 300
composite index were also being traded in the U.S. Why? Companies want to
list where their peers are. So if you're a big-cap, blue chip company that does a
lot of business in the U.S., say a Nortel Networks or auto-parts maker Magna
International, you want to be on the NYSE. And if you're a high-tech company
like Newbridge Networks Corp., you want to be on Nasdaq.
Separately, the TSE is fighting a phenomenon known in the securities industry
as upstairs trading, or direct trading between institutional investors that
bypasses the exchange.
In Canada, more than half of all trades of TSE-listed companies already happen
this way. And what the TSE has left is expected to be further eroded by
so-called ATSs (alternative trading systems) when more liberal rules governing
these low cost, private electronic exchanges come out later this year.
The net result of all these pressures is the same: lower trading volumes at the
TSE. That's a life and death issue when you consider that liquidity ? the ability
to readily find buyers and sellers for a stock ? is to an exchange what gasoline
is to a car.
So what's the TSE doing to avoid getting junked? To the delight of critics, not
much. At least, not much that has to date made investors or listed companies
sit up and take notice.
But that's not to say the TSE does not have a game plan. Indeed, in the fall of
1998 the TSE published something called A Blueprint for Success, a 24-page
document that spells out exactly what the TSE must do to survive in the new
millennium.
The blueprint is a little weak when it comes to strategic initiatives, but its
objectives are clear enough. The TSE must finally deep six its trading engine, a
legacy system known as CATS (computer assisted trading system) that has
been around since the glory days of disco, and replace it with TOREX. It must
also improve the services it offers to listed companies, and become an
integrator of market data for all Canadian exchanges, including upstart ATSs.
Each of these objectives have one thing in common ? they require an IT
solution.
This is where Thompson, who has an annual operating budget of $50 million,
comes in. Getting TOREX up and running ? a system acquired from the Paris
Bourse in 1996 and customized for the TSE's needs ? is his top priority.
Why has TOREX, which is at the centre of the TSE's planned turnaround, been
so long in coming? "Basically it's the collision of a very aggressive schedule for
developing the TOREX trading station with Y2K," says Thompson. Perhaps a
simpler answer is that the TSE got in over its head with TOREX.
And in August 1999, it rectified the situation in part by deciding to abandon the
trading station portion of the system. The reason was that after decades of
providing the machine its member firms used to place trades with the
exchange, the TSE concluded it should not be in a business which quite frankly
was not a core activity.
"Staying in that business would have required a significant investment in order
to keep up the functionality of the trading station," says Thompson. "The
Canadian market is quite small, and we decided that our members would be
better served by a relationship with third-party vendors."
How costly a mistake was this? The TSE has been careful not to disclose the
terms of its sale of the trading station to Reuters Canada ? the company it
hired to develop the station in the first place. Indeed the TSE, which has 550
employees and whose annual revenue was $149.5 million in 1998, is mum
about how much it has spent on TOREX to date ? although it is almost
certainly tens of millions of dollars.
The evolution of TOREX, like most large-scale IT systems, is a little murky. It
turns out that the system has been sitting on a mainframe computer in
Markham, Ont., ready to go since 1998. The trouble is the TSE has yet to
complete development of a gateway into TOREX, which will allow traders with
different kinds of desktop stations to communicate with the trading engine.
TOREX is now expected to be up and running by September 2000.
But even when it goes live, it will not give the TSE the sort of competitive edge it
needs to stay alive. "TOREX will allow the TSE to operate more efficiently,"
says Nigel Etherington, vice-president of strategic business development at
Versus Technologies Inc., a Toronto-based company that markets automated,
upstairs-trading services. "The bigger issue the TSE has to face, however, is
becoming more innovative and faster to market with functions and features
investors want to use if it hopes to repatriate any liquidity from the U.S."
The TSE knows this, and it's moving ? albeit at a glacial pace ? in the right
direction. A case in point is Q1234, an Internet, conference-call service
launched last year, that gives investors live, online access to quarterly earnings
briefings by listed companies. The audio service is provided free of charge, and
a video version is expected some time soon.
The exchange is also customizing a product made by OptiMark Technologies
Inc. of Jersey City, N.J., that will allow institutional investors to trade in large
blocks of shares without the danger of their intentions being signalled to the
market, which can result in unwanted price fluctuations in advance of a trade.
The TSE hopes this will bring some of the trading it has lost to the upstairs
market back to the exchange's order book. But critics say OptiMark might not
be the right IT solution for the job. "There's a huge user-friendliness issue
attached to OptiMark," says McCague of the Ontario Teachers' Pension Fund.
"It's a very complicated system, and in the U.S. it has not lived up to its billing."
What other IT initiatives is the TSE looking at to improve its competitive stance?
Over the next 18 months, the TSE wants to tackle two major projects. First, it
wants to update some 50 legacy applications that do everything from keeping
track of a stock's trading history to detecting insider trades. The idea is to
make it easier for end users to get at the information they need by introducing
such things as Web access to data warehouses. At this stage, Thompson is
not sure whether he will outsource the application updates, buy solutions in a
box, or write all the code in-house. The final answer is likely to be a
combination of all three.
Second, the TSE wants to install a data-feed product, made by Palo Alto,
Calif.-based Tibco Software Inc., a division of Reuters, that will enable it to
narrowcast specific information point-to-point, rather than broadcasting
everything over its subscriber network. "This is an extremely important strategy
as we look to becoming a data consolidator for all Canadian equity markets,"
says Thompson.
Can any of this make a big difference in a world where the Nasdaq's daily
trading volume can be nearly 10 times the TSE's annual trading volume? New
technology initiatives will certainly help, but perhaps the TSE has to focus on
what it knows best ? the resource economy. The TSE is already North
America's preeminent exchange when it comes to companies that knock down
trees and dig up minerals. Perhaps it has to become that for the world. Or
perhaps the TSE has to become a branch office for Nasdaq. Negotiations that
might result in a deal are already underway.
Will the TSE survive? "Absolutely," says Thompson. It's a knee-jerk response.
He ponders the question for a few seconds, then says, "Yeah, the TSE will
survive." That's the honest answer. Not the scripted one. You feel Thompson
really believes what he's saying.
Time will tell if he is right. |
