Whose Exchange Is It, Anyway?

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Timing is everything. With markets looking to become more and more volatile, what's a stock exchange to do? Well, if it's the

Toronto Stock Exchange

, you become a public company and perhaps even list yourself on your own exchange. Confused?

"A Blueprint for Success" was released yesterday as the first salvo in the 146-year-old exchange's attempt to move itself from the private fiefdom of 101 dealers to a for-profit model that could see shares of the TSE in the hands of individual investors.

Details are sketchy, and the report is full of words like "enhance," "competitive forces" and "integrity." But in opting to list itself on its own exchange, Toronto is merely following in the footsteps of the Australian and Stockholm exchanges. Toronto sees the membership-for-shares exchange as critical to its new strategic direction. Needless to say, there are some problems, even at this early point.

The TSE has concluded that cooperative ownership doesn't work. As president of the broker/dealer that bears his name, Tom Caldwell noted in a press report: "That could be a surprise to the lads at the

NYSE

."

In the past, all members had a fairly equal say in the running of the TSE. With the biggest investment houses now owned by Canadian-chartered banks, a large number of shares could end up in the hands of these behemoths, thus cutting out any influence of the smaller boutiques or niche players. And then there's the sticky question of how the publicly traded exchange would maintain itself as a self-regulated organization and avoid being charged with engaging in a conflict of interest.

The

Australian Stock Exchange

only embarked on its new course on Thursday, and Stockholm has yet to jump, so comparisons are pointless at this stage. All the major world exchanges have seen competition from interdealer trading and interlisting to U.S. markets.

Meanwhile, nearly 200 Canadian companies have crossed the border to list in the U.S., giving those corporations larger pools in which to raise capital and market their shares. Also, with the drive for better and faster electronic trading, the TSE needs to attract capital to fund the requisite R&D. Transforming the exchange to a public entity will allow it to raise those funds -- so it says. Perhaps it might consider interlisting on the NYSE.

The TSE is the third-most-active exchange in North America -- after the NYSE and the

Nasdaq

-- and eighth in domestic market capitalization worldwide. Total revenue for 1997 (at last report) was C$118.5 million, up 6.3% from 1996. Operating expenses over the same period were up a whopping 24.4% to C$107 million. Needless to say, raising funds to bolster working capital (C$75 million at year-end 1997) has become paramount. Not much wiggle room with those kind of figures.

To put all this in perspective, Canadian exchanges represent about 3% of world capital markets. However, like the banks before it, the TSE has visions of world domination and sees the other exchanges and the public passing it by for trading and raising capital. The TSE currently handles 85% of the Canadian business, with the

Bourse de Montreal

a distant second. With this initiative, the TSE has basically shut out any chance of merging Canada's four exchanges. No great loss there. Seriously, would you buy shares in a public company that had the

Vancouver Stock Exchange

as a constituent?

Given the problems the TSE has had over the last couple of years -- a loss of credibility over the

Bre-X

inclusion in the main index (the

TSE 300

), technology meltdowns on high-volume days and its inadequate post-Bre-X report on cleaning up the mining industry -- one has to be skeptical of this latest bureaucratic offering. While the TSE seems to have done its due diligence as far as structure, typically, it hasn't addressed the key question: Will anyone actually want to buy shares in a stock exchange? The answer?

Only in a bull market.

Northnotes:

The

Royal Bank of Canada

(RY) - Get Report

ranked first among 50 world banks for providing Internet banking services.

Wells Fargo

(DPL)

was second, and

Citigroup's

(CCI) - Get Report

Citibank was third. And, no, Royal did not commission the report.

Canada's

Olympic

shame,

Ben Johnson

, nailed twice for drug use in track competition, finally got to race in Charlottetown, PEI, recently. He went up against a couple of horses and a car. No kidding. Ben came in third. No word yet on drug test results on the horses. Or the car.

Bob Beaty writes about Canadian issues from the quiet confines of Bowen Island, British Columbia. He welcomes your feedback at

bbeaty@netcom.ca.