Columns

The markets’ new top gun

Deirdre McMurdy January 31 2000
Columns

The markets’ new top gun

Deirdre McMurdy January 31 2000

The markets’ new top gun

Columns

Deirdre McMurdy

It’s the plot of a classic western—with a twist. A small band of scofflaws stir up some noisy trouble, with the result that the good name of the entire town is tarnished. All the worthy citizens suffer under that taint, but no one is able to do anything about it—until a new sheriff rides into town, determined to toughen and enforce the rules.

Until they merged into the Canadian Venture Exchange (CDNX), that familiar plot played out on the Vancouver and Alberta stock exchanges. Respectively, those junior equity markets had become synonymous with scandals such as Bre-X Minerals Ltd., Cartaway Resources Corp., YBM Magnex International Inc. and Timbuktu Gold Corp. Despite the fact that Calgary and Vancouver boast two of Canadas richest, best-connected and most sophisticated business communities, both cities suffered under the taunts aimed at their exchanges. But that was before Nov. 29, 1999, when the CDNX began operation—and a new, unblemished era—under a new sheriff, Bill Hess.

Hess, 48, a lean and cool customer, doesn’t mince words about his mission to restore the reputation of Canada’s junior markets and to transform them into an effective national mechanism for the capitalization of small businesses. “When I took this job, I knew exactly what needed doing,” he says. “With junior stocks, you can never eliminate the business risk for investors. But you can certainly minimize the regulatory risk. Realistically, we can’t ever prevent another Bre-X scandal—but we can do a lot to detect it earlier.”

Before he accepted the job as president and chief executive of the CDNX, Hess was a Calgary-based securities lawyer and the chairman of the Alberta Securities Commission. A transplanted Montrealer with a degree in history from Queen’s University, he was instrumental in winning self-funding status for the commission, which allows it to set its own agenda and priorities. Hess fought for the ASC’s right to fine companies that violate securities laws. He was also behind the ASC’s recent move to tighten the reserve reporting requirements for junior public-resources companies.

On Jan. 7, in one of his first major moves, Hess announced a plan to audit every brokerage firm issuing new equity on the CDNX. The move is aimed at ensuring those firms are conducting adequate due diligence on the companies they underwrite. “The system in place is too focused on the rigid format of the prospectus,” he says. “That’s important—but it’s just as important to do some independent digging, to use modern technology to serve our ends.”

At the same time as he works to improve the public credibility of the new exchange and its rules, Hess is also moving swiftly to expand its scope on the national level. By early May,

he plans to have an office established in Toronto. Currently, only 260 of the 2,300 stocks listed on the CDNX are based in Ontario. “Despite all the rhetoric about its importance, Toronto hasn’t been a very friendly place for small business to raise capital,” notes Hess. “We plan to change that.”

Offices in Ottawa, Winnipeg and Halifax are also on his shortlist. “We’re no longer a regional entity, we’re national. And we have a unique position in the world,” says Hess. “Canada now has the only national, regulated junior stock exchange.”

To reflect the diverse, national scope of the CDNX, Hess also wants to adjust the mix and weightings of listed companies. At present, about 40 per cent are mineral exploration enterprises and only 10 per cent are in high tech: that is something he intends to change. “We offer the opportunity to fund technology ventures on a pre-commercial basis—something no other exchange can accomplish,” Hess declares. “We also represent an alternative and a supplement for the private venture-capital process.” He adds that the sooner venture capitalists can attract public funds, the sooner they can recirculate their pool of cash among other companies.

Although it’s still early days, the response from investors— both foreign and domestic—has been strong. Before the merger, the Vancouver and Alberta exchange Web sites averaged about 200,000 hits a day combined. Since its advent at the end of November, the CDNX average has been two million daily visits. The volume of trades was up by 104 per cent, to more than one billion shares in the first month alone. The value of those shares reached $ 1 billion. Seventeen new companies were listed on CDNX in December.

In part, the new venture exchange benefits from investors’ voracious appetite for new products in a market where more familiar stocks are trading at record highs. That enthusiasm fuelled the U.S. equivalent of the CDNX, the Nasdaq, to gain 85 per cent in value in 1999. But even speculation about a possible alliance between the Toronto Stock Exchange or the Montreal exchange doesn’t ruffle Hess, who uses a sports analogy to describe the situation: “It’s a far more senior game—we’re the farm team for the whole lot of them.”

Despite the apparent allure of Canadas junior market and the dazzling success of such listings as Wi-Lan Inc., Burntsands Inc. and Global Thermoelectric (respectively, up 1,556 per cent and 2,225 per cent since March, and 4,743 per cent since September, as of Jan. 10), Hess acknowledges that extreme volatility is not likely to abate. His advice for investors is worthy of any laconic sheriff. “Whatever happens, don’t overreact,” he advises. “And that cuts both ways.”