Regulatory hurdles
Canadian Busines Magazine
US-based Interactive Brokers has been trying to set up shop in Canada. What’s the holdup?
To US financial services firms hungry for a bigger piece of the pie, Canada has always looked like an easy slice. “Canadians work like us, play like us and, more importantly, invest like us,” the Americans say. What’s more, Yankee service is often better and almost always cheaper. How hard could it be to open up a branch office in Toronto and skim clients off the big banks north of the border? As it turns out, it’s not always so simple—and Canadian investors stand to lose more than anyone.
For foreign companies, setting up shop in Canada can signal seemingly endless negotiations with a mind-boggling array of regulators and mounds of red tape. Just ask the folks at Interactive Brokers LLC (IB) of Greenwich, Conn., beloved by active investors for its insanely cheap trades. Unfortunately, IB executives aren’t saying much these days. Nearly a year ago, the direct access brokerage began the process of opening a division in Canada. According to IB, an agreement is just around the corner; the holdup is due to the complexity of the company’s cross-border business model. The Investment Dealers Association of Canada won’t comment. But IB’s lawyers are keeping mum—they thought they had approval to court Canadian clients back in October 2001, and said as much to the media and eager investors, only to be put on hold. Understandably, this time they’re not taking any chances and want a signed agreement before making any promises to potential clients. “I think there’s just too much going on right now,” says IB spokeswoman Carla Cavaletti. “I don’t want to go out on the limb and make projections about when this is finally going to come about.”
So, in lieu of comment from tongue-tied IB senior staff, here’s the skinny on why investors in almost every major market in the world—except Canada, or course—are drawn to the company. Launched in 1993 as the brokerage affiliate of market maker and trading firm Timber Hill, IB has carved out a profitable niche offering dirt-cheap trades to retail and institutional investors. How cheap? Try 1¢ a share, up to 500 shares (with a US$1 minimum). For trades of more than 500 shares, the rate drops to half a penny each. IB gets away with those rates for a few reasons: high volumes, cutting-edge technology developed in-house, and no middlemen to clear trades. It’s that last point that seems to be the sticking point for the IDA: the company wants to use its US-based clearinghouse to keep costs down.
Another concern might be the long-term stability of IB. But it has an “A” rating from Florida-based Weiss Ratings Inc., which analyzes firms for financial strength. And in Institutional Investor magazine’s ranking of the 100 largest securities firms by consolidated capital, IB came 31st, above E*Trade Securities and Ameritrade Holding Corp. If IB’s track record with regulators is the problem, neither the National Association of Securities Dealers in the US nor London’s Financial Services Authority list more than a handful of infractions—far fewer than firms like TD Waterhouse.
Let’s get one thing straight: the regulators have a very real role to play in protecting investors from scoundrels and skullduggery, whether it’s domestic or foreign. That’s fine, until regulators assume a paternalistic role in investors’ lives. There are signs, however slight, that change is coming. The British Columbia Securities Commission (BCSC) is gathering opinions about its wide-ranging deregulation proposals. One refreshing idea is to allow Canadian investors to open accounts with foreign brokers without requiring the firms to register in Canada (as long as they don’t solicit Canadian investors)—something that is currently illegal. “We think if investors have their eyes open and choose to enter another market, who are we to say ‘Don’t do that’?” says Brent Aitken, chair of the BCSC deregulation project. A draft report is due out this June.
Once IB finally receives approval to operate here, there’s no guarantee its business model will even fly. It’s questionable whether there are enough active Canadian traders to keep IB happy. And the track record for US firms entering Canada isn’t great—Charles Schwab and Merrill Lynch are just two brokers that have retreated across the border following embarrassing defeats. But it should be up to investors, not the regulators, to decide whether they want to do business with IB. After all, it’s the American way.
© 2002 Rogers Media - Publishing |
