TSE to boost electronic trading access
Commitment part of plan to fight off competition
Friday, October 16, 1998
RICHARD BLACKWELL
The Globe and Mail
Toronto -- Faced with competition from foreign exchanges bent on stealing its listings, the Toronto Stock Exchange will expand its electronic capabilities to allow global investors to get direct access to its trading systems.
That commitment is among the many proposals in a report released by the TSE's board of governors that spells out what the exchange calls a "blueprint for success" in the new trading environment.
The TSE said there is no reason, with electronic and Internet trading systems expanding, why institutional and retail investors shouldn't eventually get direct access to its trading systems without having to go through an investment dealer.
The report also outlines a proposed new ownership structure for the TSE, where it will become a for-profit, shareholder-owned company, as early as next year. That plan would have to be endorsed by the TSE's current owners, the investment dealers who hold seats on the exchange.
Among the proposed changes:
An electronic call market will be put in place to encourage institutions to keep their trades within the exchange.
Changes will be made to boost derivatives trading.
The TSE's specialization in mining will stay.
Ownership changes may eventually result in broad public ownership.
"The status quo is not an option for the TSE," said Barbara Stymiest, chairwoman of the board of governors, echoing the argument the big banks have used to justify their proposed mergers.
The main goal of the changes, according to the report prepared with the help of Boston Consulting Group, is to "break the vicious cycle associated with insufficient liquidity by competing for the trading that has moved elsewhere."
TSE trading has been dented by companies that have listed on foreign stock exchanges such as the Nasdaq Stock Market, or who have interlisted on other exchanges. It has also been hit by "upstairs" trading, where member dealers match customer orders inside the dealer, rather than participating in the auction market at the TSE.
As a result, liquidity has diminished, making the exchange less attractive to both retail and institutional investors.
And with alternative electronic trading systems soon to pull more business away, the TSE had to take action.
The TSE's plan calls for an expansion of its electronic trading capabilities, including the creation of an electronic call market. That's a system that would make it easier for institutions to trade large blocks of shares anonymously, so their actions wouldn't have a severe impact on a stock's price, as often happens now.
To make sure that derivative trading doesn't continue its flight to other exchanges, the TSE will revamp its indexes, especially those used as a base for derivative trading. It is already in talks with New York-based Standard & Poor's Corp., which is helping it plan new indexes and fix up the old ones.
While the exchange won't adopt niche strategies such as concentrating on any narrow industry sector, or focusing on large or mid-sized companies, it will continue to specialize in mining, and add more expertise in other resource sectors.
The new ownership structure will make the exchange more nimble while it tries to put these changes in place, and allow for quicker management decisions, chief executive officer Rowland Fleming told reporters after the release of the report. He cited the decision to close the trading floor, which took years as a result of the TSE's consensus approach to management.
The new ownership structure will also give the TSE more flexibility in raising money, especially for expensive changes to technology. But Mr. Fleming was quick to note the exchange is not currently in need of new funding.
The TSE will initially issue shares to its current seat holders, all of whom are investment dealers. There will be restrictions on the number of shares any individual institution can own, and some limits on how those shares can be transferred to other owners.
Eventually institutional investors and listed companies may get a crack at the shares. And further down the road anyone who's interested may get a chance to buy TSE stock if it does a public share issue to raise money. Broad ownership, however, "is not in the cards in the immediate future," Ms. Stymiest said.
The TSE will not go as far, at least for now, as the Australian Stock Exchange, which began trading as a listed company Wednesday. That exchange is in the unusual position of holding a listing on itself.
The TSE plan says it will also designate at least half its board seats for directors "outside the investment dealer community."
The change in ownership will require approval of two-thirds of the current 106 members. Cross-country meetings to explain the concept to members will begin this year, and a formal vote will be taken in 1999 after a business plan is developed.
Ontario legislation that governs the TSE will have to be changed, and the Ontario Securities Commission will have to approve. OSC chairman David Brown said yesterday he is pleased the TSE is making plans to deal with changes in the marketplace, and the OSC will support any plan that, after careful review, appears to help to maintain "a strong and efficient capital market."
But there will certainly be opposition from some current members of the TSE.
Some think a new ownership regime is unnecessary, given that other exchanges work well as co-operatives. Other members want much more substantive changes such as a merger between the Toronto, Montreal, Vancouver and Alberta stock exchanges.
Mr. Fleming rejected that possibility. "It is realistic that other exchanges serve very important regional needs." He said the TSE will continue to work closely with the other exchanges and co-operate where needed.
Another proposal in the TSE report that is bound to be controversial is its suggestion that it keep all the regulatory responsibilities it has now. Ms. Stymiest said the TSE is "one of the best market regulators in the world," so there's no need to shift that responsibility elsewhere if it becomes a for-profit company.
That annoys some of the TSE's potential competitors who would like the freedom to compete with the exchange by conducting trades electronically over private networks. "You can't compete with a provider of services if they make the rules," one brokerage executive said.
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