In the cavernous Tokyo Stock Exchange, traders are accustomed to shouting orders for the shares of Honda Motor Co. Ltd., Hitachi Ltd. and other Japanese companies. But the blue-suited traders are becoming increasingly adept at selling the shares of foreign firms. Montreal-based Bell Canada Enterprises Inc., for one, listed its shares on the Tokyo exchange a year ago, and Chrysler Corp. of Detroit appeared on the exchange in September. Last month the Royal Bank of Canada became the fourth Canadian company to list in Tokyo. Japan has become a magnet for large companies seeking financing because of its $90-billion capital surplus—earned largely from exports—and its recently relaxed stock-trading rules. But the popularity of the Tokyo exchange is only part of the booming growth in international trading, made possible by computers that enable investors to tap markets day and night from Sydney to New York. Said Graham Aitken, the Royal Bank’s senior vice-president and treasurer: “Now there are only three hours in a 24hour day when our stock is not traded somewhere.”
For corporations and investors, round-the-clock electronic access to foreign markets means that the quest for a better deal is almost limitless. As computer links between stock exchanges proliferate, trading in stocks, bonds and currencies is transcending time zones, national borders and regulatory jurisdictions. Worldwide,
472 companies now trade their shares on more than one stock exchange, up from 234 at the end of 1984. And in the case of Canadian companies that trade in both Canada and the United States, 48 per cent of the trading in their stocks so far this year has been on U.S. markets.
Last week the London Stock Exchange opened its doors to competition as it adopted a sweeping set of regulatory changes known collectively as the Big Bang (Maclean’s, Nov. 3). For its part, the Ontario Securities Commission (OSC), which oversees the Toronto Stock Exchange (TSE), is drafting regu-
lations that would permit foreign investment firms to increase their ownership of Ontario-based investment dealers—a move that some dealers have called the Little Bang. Some experts argue that the changes are necessary because only larger firms have the capital required to compete internationally. Said Michael Sanderson, chairman of Merrill Lynch Canada Inc.: “Toronto must keep pace with the foreign exchanges in order to stay as one of the world’s leading capital markets.” The key to the explosive pace of international trading is the computer. Before automation, dealers relied on Telex and telephone conversations with foreign brokers to trade a stock outside the country. According to Donald Hudson, president of the Vancouver Stock Exchange, sometimes the delays prevented the deals from concluding that day and the stock quotations
would change. Now, if there is a better market in the United States, a Toronto trader on the floor of the TSE can use his computer terminal to instantly trade a stock, such as Imperial Oil, on the American Stock Exchange (AMEX) through a computer link with the TSE. According to Larry Haughton, a partner and trader at McCarthy Securities Ltd. in Toronto, within the next six months traders in Paris and London will be able to buy and sell TSE-listed stock using computers. And eventually computers will allow traders to deal instantly on exchanges from London to Tokyo.
For companies, the growth of computerized world trading has made it easier to raise more money through increasingly large stock issues. Traditionally, the size of new stock offerings has been limited to what dealers think the local market can absorb. If stock was issued and left unsold, the share price tended to fall. But during the $6.5-billion privatization of British Telecom in 1984, the British government successfully sold all three billion shares by issuing them simultaneously in the London, U.S., Japanese and Canadian markets. Indeed, the limited capacity of the Canadian capital market to absorb large stock issues was one reason for the Royal Bank’s decision to list in Tokyo last month. Said Geoffrey Styles, the bank’s vice-chairman: “We needed to go outside. In some instances, we are getting too big for Canada.”
In North America the fastest-growing market is the National Association of Securities Dealers Quotations (NAS-
DAQ), which operates entirely by computer and does not have a trading floor. NASDAQ’s rapid growth is spurred by the fact that its trading rules are less restrictive than other markets. It now trades 300 foreign issues—three times the number of foreign issues on the New York and American stock exchanges combined. This year NASDAQ has added 208 new company listings, for a total of 4,344, compared with 22 new listings on the NYSE, with 1,563.
In Ontario upcoming changes to securities regulations are designed to help stem the flight of capital to for-
eign exchanges and to thrust Toronto’s Bay Street, Canada’s financial capital, into the thick of global trading. Last June, Ontario’s minister of financial institutions, Monte Kwinter, announced that the government would permit foreign brokers to own as much as 30 per cent of a Canadian investment firm, up from the current limit of 10 per cent. Non-Canadian investment firms would also be allowed to open their own subsidiaries, providing the capital of their combined operations did not exceed 30 per cent of the domestic industry’s total capital. Ontario may also propose a revision to the federal Bank Act to allow banks to buy 30 per cent or more of a securities firm. Banks currently are prevented from owning more than 10 per cent of another Canadian corporation.
For their part, bank executives are holding talks with major Bay Street brokerages. According to one securities firm chairman, Bay Street rumors have
paired Wood Gundy and the Royal Bank. However, a bank official has denied the rumor. Said Paul Cantor, president of the Canadian Imperial Bank of Commerce’s Investment Bank, which has already acquired two brokerage firms abroad: “We need to have the right to acquire up to 100 per cent of an investment dealer in order to build the Canadian link into the global network.” If the Ontario government introduces its changes as planned on Jan. 1, they could alter the face of the Canadian securities industry. Many domestic investment dealers are concerned that they will be hurt as huge multinational securities firms, capable of driving down commissions, gain a foothold in Canada. Indeed, Tokyo-based Nomura Securities Co. Ltd., the world’s largest investment dealer, is planning to open a subsidiary in Toronto with a staff of 25 in January. But Ermanno Pascutto, a director of the OSC, says that he does not believe that Canadian companies will be overwhelmed by the increased foreign presence. Said Pascutto: “Canadian companies have the advantage of competing on their own turf and dealing with clients they know very well.”
In anticipation of the upheaval, Canadian investment firms are scrambling to build up their capital by going public or joining forces. Nesbitt, Thomson Inc. of Montreal and Pemberton Houston Willoughby Inc. of Vancouver have each offered shares in the past four months. And on Sept. 30, Nesbitt Thomson bought F. H. Deacon Hodgson Inc. of Toronto. Last week Toronto’s Dominion Securities Ltd. bought Montreal’s Molson Rousseau Inc. for $10 million. Said Dominion president Anthony Fell: “We are going to see some more major mergers.”
The move to deregulate the Toronto stock market also raises the fundamental issue of who should have sovereignty over Canadian finance. Said Stanley Beck, chairman of the OSC: “This is the classic Canadian dilemma: how do we create a sufficient opening to improve ourselves and at the same time protect ourselves?”
Canada’s ability to respond to the rapid changes in international securities trading is hampered, some experts argue, because the country has no national agency that regulates securities—only provincial commissions. In the meantime, the OSC and the U.S. Securities Exchange Commission have agreed to co-operate on surveillance and information sharing. Now, as the Royal Bank and other companies move to invest in such lucrative foreign markets as Japan, it is the regulators who are scrambling to keep pace.
-ANN WALMSLEY with THERESA TEDESCO in Toronto and DAVID LINDORFF in New York
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