The formation of a national junior exchange would allow Canada to become a world leader in electronic trading of resource stocks under the right circumstances, say observers.
“If the Canadian exchange turns out to be a very efficient, order-driven, electronic execution system and if it has a decent regulatory system in place, I think a lot of the more legitimate companies would want to list there,” says John Kaiser, editor of the California-based Kaiser Bottom Fishing Report. “It could become one of the most liquid gambling machines in the world for resource stocks.”
Canadian stock exchanges are known worldwide for their mine financing capabilities, but their credibility has suffered as a result of recent scandals such as Cartaway Resources, Timbuktu Gold and the infamous Bre-X fiasco.
Under the restructuring proposal for Canada’s securities industry announced in March, the Vancouver and Alberta exchanges will merge with Toronto’s Canadian Dealing Network. Junior companies currently listed on the Montreal Exchange and the Winnipeg Stock Exchange have also been invited to join the group.
The restructuring will make the Toronto Stock Exchange Canada’s only senior equities exchange, while Montreal will take over options and futures trading.
The new junior exchange will be similar to NASDAQ in the United States, but a lot smaller and – at least initially - more heavily weighted by resource companies rather than high-tech stocks. It will be based in either Calgary or Vancouver and maintain offices in Montreal and Toronto.
Michael Johnson, president and CEO of the VSE, says creating a specialized market with uniform regulation will improve the ability of Canadian juniors to compete internationally and attract more institutional investment.
Some dispute this claim, arguing that the merger is little more than a cost-saving measure for the exchanges and their members that will have little impact on the listed companies.
“There are definite advantages to the merger from the point of view of efficiency. But it’s not going to increase liquidity, “ says John Woods, editor of Canada Stockwatch.
And Canada’s position as the world capital of exploration financing may well be lost rather than enhanced if exchange officials do not take advantage of the restructuring to increase accessibility to retail investors, Kaiser says. He argues that both speculative investors and junior listings will move south of the border in search of better liquidity and a larger audience, leaving the new exchange to wither.
“The whole thing clearly must become much more electronic,” concurs Gerald Harper, president of the Prospectors and Developers Association of Canada. “It should be almost as easy as phoning up and asking to rent a terminal for the junior exchange in, for example, Thunder Bay.”
Officials from the ASE and VSE say the new exchange will be fully electronic but that providing online trading for retail investors will not be on the agenda at anytime in the foreseeable future.
“We’re looking to provide, through the merger, improved access to trading for our members. But providing on-line access to trading for investors is not currently part of the consideration,” said a VSE spokesman.
Tom Cumming, president of the ASE, said the new exchange’s first priority will be to foster a reputation for the quality of its listed companies, its regulation and its management.
But regardless of the ultimate direction, the creation of a new junior exchange is facing a number of hurdles.
There is some resistance to the restructuring in Quebec, where an advisory committee is reviewing the proposed changes and ME-listed juniors have voiced concerns about losing credibility from an affiliation with the Western exchanges, where recent scams like Bre-X originated.
“Montreal must have a branch office with the power to make decisions and the board of directors (of the junior exchange) must include representatives from the Montreal exchange,’ says Guy Parent, president of the Quebec Prospectors Association.
The VSE’s lingering reputation as the “scam capital of the world”, a designation assigned by Forbes magazine about a decade ago, also hangs like a dark cloud over the merger.
“Moving the exchange to Calgary is the easiest way to bring closure to that unhappy time,” says Woods.
Another thorny question is how to police a national exchange when each province has its own independent securities regulator. Although the possibility of forming a national securities commission in Canada has been discussed for years, there has been little progress towards this goal.
Meanwhile, the very companies the new exchange is hoping to serve – junior resource stocks - are mired in the worst bear market this decade. Low commodity prices and the lingering effects of Bre-X on investor sentiment have turned many high-flying exploration stocks into worthless shells. The barometer of the junior mining sector, the VSE Composite Index, sits at the 425 level, down from about 1500 in early 1997.
Until these stocks become more attractive to investors, the new national exchange will have little clout either domestically or internationally.