Policies discussed at a private conclave in Paris earlier this month will eventually eliminate the trading floors of Canada’s stock exchanges.
“What we’re moving toward is a oneworld stock market operated out of an international network of black boxes that will stay on stream 24 hours a day, seven days a week,” I was told by Andrew Kniewasser, president of the Investment Dealers Association of Canada (IDA), who sent a representative to the French meeting of the securities committee of the Organization for Economic Cooperation and Development. “When you have that kind of technology—and it’s available now—there’s no need for a physical trading floor, only computers. There’ll be lots of opposition from the existing floor traders, of course, but you can’t fight the future too long without becoming uncompetitive. So the much wiser action for Canada would be to plug directly into the new system. Only by not having to go through New York, London or Paris can we stay as real players in the international investment game.”
The inevitable modernization process that the new trends imply will inevitably force Canada to delegate a considerable degree of sovereignty to a yet-tobe-established international securities commission. “All of the participating nations may have to come under a United Nations-like regulatory agency,” Kniewasser predicted. “That’s quite an irony, because in Canada at the moment we have yet to agree even on a federal securities commission. What a bunch of bohunks we are. Yet somebody will eventually have to speak for this country with one voice.” (Unlike the United States, where Washington’s Securities and Exchange Commission rules the roost, Canadian stock markets are supervised by provincial commissions in Ontario, Quebec, Alberta, Manitoba and British Columbia.) “You can’t delegate trading activities to any electronic devices unless you have effective international trading regulations,” added the IDA president.
“The Americans are currently at the leading edge of the trend to accomplish precisely that,” Kniewasser continued, “and one of the topics we discussed in Paris was how to establish common criteria over the most widely traded securities. I can conceive of two-level markets where some of our leading issues, including Inco, Stelco, Alcan, as well as government of Canada, provincial and
hydro bonds would be traded internationally, while there might be a separate market for specifically North American or Canadian and even local securities.” Such forecasts sound revolutionary, but the exchanges in London and Cincinnati have already eliminated their trading floors, and others, including Copenhagen, are preparing to follow their example. Within the next few weeks the Toronto Stock Exchange will begin an experiment with a modified computer-
trading system that will involve 24 of its most active interlisted securities.
Kniewasser, who spent more than 20 years in the public service (including a spectacularly successful stint as general manager of Expo 67), is an outspoken character whose greatest concern is the exponential multiplication in the influence of Canada’s Big Six banks. “The banks would like to take over car leasing, as well as much of the computer service business,” he said, “and of course they already own most of the large in-
vestment dealerships. It will take a while for these acquisitions to shake themselves out, but it’s pretty clear that if a bank buys you, they run you. Despite the growing power of the banks, I just don’t believe that Canadians will accept the levels of corporate concentration that already exist in Europe.”
What Kniewasser says that he fears is the equivalent of West Germany’s “universal banking system,” where half a dozen financial institutions control almost all of the country’s banking, trust, insurance and securities businesses. “They have such power,” he added, “that the Frankfurt exchange is only open 20 minutes a day. A few bankers walk in and transact some business before going off for a schnapps. But 80 per cent of the trades are done in private without the benefits of an auction market. If the six Canadian banks keep growing, we could end up with some version of Germany’s universal banking system.”
Meanwhile, the investment industry is growing even faster than the banks. A year ago the Investment Dealers Association had 60 members; there are 85 now, and Kniewasser’s office is processing at least 50 new applicants. Most of the newcomers are major foreign investment houses and the capital of one—Tokyo’s Nomura Securities—is far greater than that of all the Canadian securities dealers combined. The effect of this influx will be to stiffen competition on an unprecedented scale so that Bay Street will face some drastic shake-outs.
“It isn’t clear yet where this new financial system of ours is going to wind up,” Kniewasser told me. “There was capitalization of about $1 billion in the Canadian investment industry a year ago; today the total is $2.6 billion. Curiously, $1 billion of these new funds is not being used in the business, which means that the firms are seriously overcapitalized and not making adequate profits on investment. Return on equity in brokerage houses used to be about 28 per cent. Now it’s down to eight per cent. That can’t continue without some serious corporate realignments.”
Whatever the prospects for the recently reorganized investment houses might be, the future of stock-exchange floor traders is set: they don’t have one. And the $25-million Toronto Stock Exchange trading floor opened only five years ago? That’s simple. Predicts Kniewasser: “It will make a great bowling alley.”
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