Canadian Exchanges Look to Merger Plan to Stay Competitive

Shuffling big-caps to Toronto and consolidating derivatives in Montreal are aspects of the proposal.
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VANCOUVER -- Like attempts to conquer the northern frontier or fight Mother Nature's spiteful winter weather, internal squabbling is a time-honored component of the Canadian experience. Anglophone fighting Francophone. The Prairies vs. Ontario. Quebec against everybody.

Increasing globalization of everything from energy markets to hockey's labor pool, however, is pushing rival parts of the Great White North into one another's arms. Nowhere was this more visible than the March announcement that Canada's four most important stock exchanges were considering a merger in order to stay relevant in the increasingly competitive global capital markets. Government rulings are expected soon.

Aside from the boos and hisses of Quebec nationalists and a vocal group of futures traders in Toronto, the reorganization has met with a positive, if reluctant, reception. Like the European exchanges before them, Canada's bourses know that resting on their shrinking laurels is a sure ticket to financial backwater status.

The country's largest market, the

Toronto Stock Exchange

, stands to gain -- or lose -- the most from the imminent shakeup. Canada's fortunes on the world's financial stage ultimately lie with the TSE, and vice versa.

The nation's flagship exchange has taken its cues from the

Stockholm Stock Exchange

, a now-flourishing market that redefined itself in the early 1990s, and the

Deutsche Borse

, which has forged alliances with other European exchanges in an attempt to attract business.

"This initiative reflects the commitment of exchange management and industry leadership, both of which recognized the perils of inaction and the merits of moving forward," says TSE President Rowland Fleming.

It's also a recognition that if the TSE and its smaller siblings don't act quickly, they face extinction. Already, international investors perceive that Canada's exchanges lack direction: They compete with one another, aren't focused and face an uncertain future. The goal of the consolidation is to alleviate all of those fears.

Among the highlights of the plan:

  • The Toronto Stock Exchange will handle all big-cap Canadian equities, including those that now trade on the Montreal Exchange, creating a deeper pool of blue-chip issues.
  • The Montreal Exchange will specialize in options and futures, creating the first derivatives-only exchange in Canada. Options from the TSE, as well as futures from the Toronto Futures Exchange, will be transferred to Montreal -- thus the vocal opposition of Toronto futures traders.
  • The Vancouver Stock Exchange and Alberta Stock Exchange, neither of which has a particularly strong reputation, will merge to create a national junior equities market, consisting of small- and mid-cap issues and called the Canadian Venture Exchange. The exchange will also include the Canadian Dealing Network, the Winnipeg Stock Exchange and junior listings from Montreal, and it will have corporate headquarters in Calgary, with operational headquarters in Vancouver.

A key selling point to the investment community is that each exchange will be devoted to doing one task very well, creating cost efficiencies for its listings, member firms and, ultimately, retail investors. At the same time, more vibrant markets will give way to increasingly liquid and transparent markets.

The big winner from the consolidation plan, on the surface, is the Toronto exchange, which currently accounts for about 90% of all equity trading in Canada. The 147-year-old war horse saw more than 26 billion shares change hands in 1998 -- about C$2 billion ($1.35 billion) a day in share transactions -- making it one of the world's top exchanges. Taking full control of the country's senior equities can only help matters for an exchange currently ranked seventh in the world in terms of market capitalization.

Its success, however, is far from certain, says Thomas Caldwell, president of Toronto-based

Caldwell Securities


"The enemy is already inside the wire," he says, pointing to the glut of trading between member firms that retail investors never get to see. "The problem is the auction market environment has become very thin because the big trades are happening upstairs. The price-discovery mechanism is becoming suspect."

The TSE agrees. Despite increases in total trading volumes, its own reports conclude that the exchange's pre-trade liquidity continues to diminish every year. And the Toronto crowd knows full well that liquidity can make or break its fortunes when inter-listed stocks are on the line. Investors naturally gravitate toward the exchange that offers the greater liquidity on a listing, and as it stands, the

New York Stock Exchange

and the


have Toronto beat, hands down.

But unless the deal gets bogged down in red tape, it's almost guaranteed to go ahead. Right now, it's awaiting rulings expected this autumn from regulators in Alberta, British Columbia, Ontario and Quebec.

In the meantime, the stock exchanges will continue to wave the maple leaf and push for unity. And despite the usual hostility reserved for Ontario's capital city, Canada's financial markets will need the Toronto Stock Exchange's leadership -- and global success -- more than ever.

Derek Moscato is a freelance financial journalist in Vancouver.