Canada’s listing needs justify seperate exchange

Canada will keep its exchange.

So said panelists at the Canadian Equity Market conference, presented by Ontario Securities Commission and IIROC in Toronto today.

Despite cross-border exchange mergers and a notion that trading works more efficiently as part of a global infrastructure, TSX senior vice-president Ungad Chadda said that market participants like to trade where they live.

He noted the TSX could conceivably do a number of alliances, but “a number of countries see Canada as a destination to trade.”

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He added that while 40% of TSX trading comes from abroad, the bulk of that from the United States, a great deal of traffic crossing the border happens for arbitrage reasons.

“We have a world champion in creation of small- and medium-sized companies,” Chadda said. “So when we look at mergers, we have to look at them in terms of [whether] the needs of listers can be met. If the answer is no, you have to move on.”

He added international firms and governments visit the TSX Venture to find out how it works, adding it’s the envy of the world.

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Other panelists noted the exchange is only part of the equation. A big chunk of what makes Canada attractive is its dealer and analyst community. Without it, you don’t gain the attention of the outside market.

Canada is unique in that it can conduct IPOs at significantly smaller cap levels than the U.S. and has a friendly civil liability regime.

Regarding the future of exchanges, panelists note that other efforts like the creation of private listing groups will only lead to problems. As one quipped, “We throw rocks at the exchange model but try to replace it.”

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What will likely change is the sum that can be charged per listing. Competition from secondary markets will continue to commoditize listings, so exchanges will have to respond by improving other services.

Regulation will also have impacts, but as exchanges demutualize and shed regulatory functions, they’ll be increasingly responsible for their own compliance.

“In making decisions on a regulatory front, you’re aware your reputation is critical to attracting business,” said Richard Carleton, CEO of the Canadian National Stock Exchange.

Added Chadda, “It’s critical for long-term reputational capital. It’s like a grocery store. You can’t cut corners and put out stuff that makes people sick.”

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Canada has also been in the forefront of exchanges shedding their regulatory roles, said John Carson, managing director of Compliax Consulting.

He added exchanges want to shed those roles because they’re costly and arguably can be performed better outside the exchange, which lets them focus on their business interests.