globeandmail.ca
TSE shows it's utterly incapable
Brian Milner
Friday, October 27, 2000
Let's face facts. If the Toronto Stock Exchange is our best hope of preserving a healthy independent capital market, we're doomed.
Twice this week, the TSE has shown itself utterly incapable of doing its job, cutting off trading in its most celebrated listing, Nortel Networks, when its mess of computers couldn't cope with a sudden surge of orders. It was a humiliating turn of events from which the TSE won't quickly recover.
Canada's premier exchange couldn't handle trading in its premier company, and there are still people who think we can be taken seriously as a player on the global finance stage?
The transactions immediately gravitated to the vastly larger and more efficient New York Stock Exchange, where Nortel also trades . . . and maybe that's where they belong.
The NYSE and Nasdaq can easily process huge daily trading volumes.
Yet even Nasdaq, the original electronic market, faces capacity constraints as volatility in its technology-dominated universe sends activity skyrocketing.
Nasdaq yesterday handled nearly 2.3 billion shares, its sixth-highest level. The NYSE reached 1.3 billion, about 25 per cent above its typical daily number.
The TSE's daily average stands at 168.2 million. Nortel transactions alone yesterday numbered 75,000, compared with a daily average of 69,000 trades last year for all stocks. On Wednesday, 10.8 million Nortel shares proved too much for the TSE's beleaguered system, prompting an early halt to Nortel's trading day in its home market. The same day, New York handled 124 million Nortel shares. Need we say more?
In a sense, the embarrassing computer snafus of the past year have helped clarify the TSE's future, and it is definitely not as a member of the global elite.
"It's a devastating thing to have happen to you," said a sympathetic Wall Street investment banker. "But look at this way. It might not happen the third day, because no one will be trading."
Yesterday morning's 55-minute halt and Wednesday's all-afternoon stoppage were blamed on continuing problems with the TSE's "order book processing capacity." But the technological problems, including the fact the exchange is still using an outmoded trading system while phasing in newer technology, are almost beside the point.
The French, Germans and Swiss -- among others -- have poured money into technology to make their domestic exchanges more competitive. Yet they still face a losing battle in trying to retain the bulk of the trading in their leading companies.
Capital gravitates to the most efficient markets, and Toronto is simply no match for New York, with its enormous liquidity and lower costs.
That doesn't automatically spell an inevitable bad end for the TSE, although there were some traders Wednesday who were wishing the exchange would disappear off the face of the earth and take its junky technology with it.
But the exchange does need to decide where it fits into the rapidly changing and increasingly borderless world of finance.
Trying to claw back all the trading activity of the biggest Canadian companies is a hopeless proposition. Nortel, about 50 other globally recognized players and the investors who back them will continue on the path they have already cut: gravitating to the markets where they can obtain the most capital for the lowest cost.
The TSE should resign itself to being no better than a regional exchange -- the logical home for Canadian stocks that elicit little interest outside the country.
Quite simply, as the Danes, for example, have decided, it makes no sense to spend a fortune trying to hold on to their best companies.
"The local exchange becomes the place for the non-global component of the market," said Roy Smith, a retired Goldman Sachs partner and a professor of finance at New York University.
Mr. Smith offers another outcome that for now remains politically unpalatable, even as it happens in reality: the integration of Canada's financial marketplace with that of the United States.
The move toward a single financial market seems inevitable, and maybe that's the TSE's real problem. It has become the unwitting victim of what Mr. Smith calls "involuntary deregulation." |
