Taking over, seat by seat
THE NEW MASTERS OF THE UNIVERS
Brendan Caldwell is reinventing the world's stock exchanges
PETER C. NEWMAN
A MACLEAN’S SPECIAL SERIES
This is the second in a monthly series on the New Masters of the Universe, under-40 Canadian entrepreneurs who are revolutionizing our once-sleepy business ethic:
IT IS NOON ON A SUNNY October day at the Toronto Club, a Victorian mansion at the downtown corner of York and Wellington streets, where the Empire City’s power barons gather for lunch. Looking at the roster of members, it is tempting to suggest that the city must have been named after the club. In fact, it was founded in 1835 by Upper Canada’s Family Compact, a year after the pioneering settlement of York assumed its new identity.
What makes its theatrical decor different
from, say, the stage setting of a Hercule Poirot film, is the stillness that pervades the place. It is more of a hush than merely silence or the absence of noise, but also the feeling that great events might be unfolding here, where the older generation of Canada’s powerful cognoscenti still meet and greet. They feel safe in their private sanctuary, where they are recognized for who they are, and not merely for what they do—which, of course, is precisely the opposite qualification of the new-style meritocracy, whose more contemporary members—technocrats, geeks and global players—are taking over. Instead of eating at the Toronto Club, they hang out in stylish rooftop restaurants, or more likely work through their lunch hours.
Today is Caldwell Day at the Toronto Club. The family brokerage has rented most of its top floor for a presentation to Bay Street’s most influential players. CEO Brendan Thomas North Caldwell, 37, one of the investment community’s top producers, will detail the success of his company’s Growth Opportunities Trust, the flagship fund that is making history in an industry not known for either imagination or innovation. What they are selling sounds intriguingly close to having invented a perpetual money machine.
Any investor can profit or lose as stocks fluctuate up or down. That’s easy. But the Caldwells sell investors the right to buy shares in their Growth Opportunities Trust, which owns shares, memberships and seats of the world’s stock exchanges, whose owners benefit financially from every transaction—whether clients are buying or selling. That was the message Brendan Caldwell brought that day to the four dozen brokers and investment advisers who came to hear him. Since it was created two years ago, the Opportunities Trust has increased in value by 48 per cent. It was not a hard sell.
One sunny October afternoon, I went aboard the Caldwells’ family sailboat, the Pendragon, a Nonsuch 30, proudly tied up at the Royal Canadian Yacht Club, where we continued our conversation. “Entrepreneurs provide the impetus for everything that happens in the capitalist system,” Brendan told me as we putzed around Lake Ontario, “because they see how things are done, then conceive and implement change. They are the indispensable catalysts and implementers. Some of the best ideas you’ll hear while seated on a bar stool, but it’s the doing of the thing that makes the difference. When you’re looking to be an agent of change it’s not as though you’re setting out to join the Missionaries of Charity, you’re looking to make money from what you’re doing, there’s no question. For a lot of people in business, the challenge of changing ‘what is’ gets a person going; it’s the economics that both drives it and attracts the people you need to make change happen.”
As well as father Tom Caldwell, the firm’s chairman and founder, who originally conceived the idea of specializing in stock exchange seats and set down the matrix strategy for their acquisition, and Brendan, who now runs the outfit, the family is also represented by younger brother Theo. He is a lively and literate investment analyst who also writes plays as well as books, heads Caldwell Asset Man-
agement in New York, and unofficially acts as the vice-president in charge of pushing the family into the 21st century. They’re a fiercely independent trio of doers and thinkers, fuelled by their faith in serendipity. The success of their gambit in buying stock exchange seats depends for its success entirely on luck and timing. So far both have run their way—but both remain unpredictable.
When the caper started in the late 1990s, the Caldwells were dead set against the Toronto Stock Exchange changing from being run like a private country club to a public company. A seat on the exchange was then worth $50,000—only half as much as the required investment for a Toronto taxi licence. “After the TSE went public, seats were suddenly selling for $4-5 million apiece,” Brendan recalls, noting that of the 120-odd seats in existence, the Caldwells owned just
‘When one owns the exchange, it’s like owning a casino,' Caldwell says. ‘Every bet that's placed is profitable.’
one. It was at that point that the Caldwells switched horses and embraced the idea of taking stock exchanges public—and realized that millions hung in the balance if they set their sights on the venerable New York Stock Exchange.
“That inspired us to go buy a seat on the New York exchange, and then another and another and another. At the time Toronto went public, the New York Stock Exchange was run like an old boys’ country club. Every time the members got together was like an AA meeting. They’d get up and say, ‘My name is Jim Smith. I’ve been a member since 1957.’ They stopped short of saying, ‘Hello,
Jim,’ the way they do at AA meetings, but everybody was fiercely proud.
“When we started to buy seats in New York, the arguments we got were angry. I won’t say violent, although one of the members did pack a side arm, so when you met him on the street, you always agreed with what he said. For us, changing the structure of the NYSE was absolutely fundamental—to get it away from the closed parochial selfserving club atmosphere and obtain some transparency. We just kept buying seats. We wrote a whole series of letters to all the members explaining why, as a public company, their seats would be worth $9 million each— they were only trading for $1 million or $1.5 million at the time—and why it would be good for the U.S. capital markets and for the American economy as a whole. On April 20 , the New York Stock Exchange
announced it was becoming a public company. Eventually, we owned 49 seats.”
It was a tough gig. Every seat had to be bought in the name of a real flesh-and-blood human being before it could be converted into shares, and one person could only own one seat, so the Caldwells had to find 49 people they liked and trusted. “We started with our chairman, me, and my brother, our CFO, our head of compliance, our traders, salespeople, my mother and my wife, my aunt and the cousin we trust, right down to a young lady who joined as an assistant. The day she arrived we gave her an application to become a 24-year-old member of the New York Stock Exchange. Now the seats are worth $6 million or $7 million [in stock value] depending on the day. It was an interesting way to begin.”
The Caldwells caused a minor revolution in markets the world over. Owning a part of an exchange had been seen as a means to an end, never as a profit centre. The service fees exchanges generated were a small slice of the pie, but the pie was enormous. The New York Stock Exchange currently moves stock worth in excess of $20 trillion annually, compared to say, eBay, which sells maybe $50 billion worth of antiques and junk per year. The turnover is growing exponentially because there’s so much money looking for a home. “The stock market’s current volatility drives volume, and as much as one is biased toward the market going up, when one owns the
exchange, it’s like owning a casino—every bet that’s placed is profitable,” says Brendan. “Every stock purchase, every sale—and more of them are going on, driven by the ability to do them faster through electronic trading—provides benefits. Now we started looking around because we’d done this with New York and seen it in Toronto. The biggest investment we have outside of New York is at the Chicago Options Exchange.”
The options market defines volatility, but that doesn’t make Brendan nervous. “They’re a little bit esoteric, a little more involved than just stocks—not everybody understands them as intuitively—but they are one of the primary means for both protecting a portfolio or an individual position and for speculating, and people use them for both,” he con-
tends. “And, particularly as this world becomes a more volatile, more interesting, more global place, institutions and personal investors, private investors, look to do both, both to speculate and to protect themselves. And so the biggest options exchange in America is the Chicago Options Exchange, and we’ve replicated really the same idea, buying up seats in that. Now, the thing to be really successful in these exchanges is you need to be able to get the seats. It’s not like buying a public company where there’s as much to be bought as you want to put your money into. With a seat you actually have to get—and possibly know—the person that you’re buying it from, and it makes it a one-by-one-byone process, because there’s not an unlimited number.”
Led by Brendan, the Caldwells have rep-
licated the tactic the world over and now own up to 10 per cent of the seats or shares in 33 stock and commodity exchanges from Karachi to Johannesburg, Bermuda to Hong Kong, and Kansas City to Winnipeg. At the moment, the firm has $700 million invested in their acquisitions, but by the end of this year, that total could exceed $1 billion. Tom Caldwell predicts that over the next five years, every exchange worldwide will either become a public company or be acquired by one. He is convinced that such a transformation, now that it has started, is inevitable. “Once an exchange becomes a public company, with a motive to make profit in its own right,” he points out, “it has a tremendous ability to generate cash. It’s analogous to taking a piece of property that is
zoned for single-family dwellings and getting it rezoned to high-density commercial. The value increases even before one begins to build. It’s like buying Coca-Cola before it goes public.”
Among the hottest plays at the moment are the expected merger of the Toronto and Montreal stock exchanges, and the Caldwells’ major move into India. They already own four per cent of the Bombay Stock Exchange through a company established in Mauritius. This is their third-largest holding, and is about to blossom because the Bombay Exchange is expected to go public within the next two years.
“We’d wanted to actually invest in India for a long time,” says Brendan. “We never understood the spinning wheel on the Indian flag, which is a symbol of independence, so well as when we actually tried to make an investment in India. I won’t say we weren’t welcome, but Indians were going to do it on their own. We’d sent in an audit firm last year to look at the exchange and see what possibilities there might be down the road. Just before Christmas, the Indian government changed the rules entirely and mandated that the cartels—the old boys’ clubs in that country that controlled the exchanges—had to be broken up and that they had to divest themselves of 51 per cent of their ownership of the big exchanges. So we had people on the ground at exactly the right time.” He makes the point that for stock markets to flourish in the Third World, there must be a middle class, and that this sector of India’s population is expanding by the equivalent of Canada’s total population every year.
There’s always a better way, as new technology, new approaches, new concepts come along. The most obvious example of this pivotal transformation has been the switch from stock exchanges being physical places where people are yelling across floors, to trades being completed electronically, though the traders are still virtually meeting in the same place. “Actually,” Brendan contends, “electronic exchanges are being created all the time. There are lots of eBays being established and Facebooks being started, or YouTubes, where people meet for specific purposes: in eBay’s case, to trade antiques and junk, in YouTube’s case to trade video samples, in Facebook’s to trade personal details. There are other sites you can go to but they don’t have the eyeballs. So if you’re an incumbent provider you have a tremendous advantage, which is where we see the value in the stock exchanges.”
Peter Munk, chairman of Barrick Gold and a friend of the Caldwells, had an inordinate impact on their thinking when he recently told them: “Money must be the result of what it is that you do, but not the reason for what it is that you do.” Of course the Caldwells are in business to make money, but they also give it away with considerable flair. They are generous but fussy philanthropists. At the moment, they are working together to build a unique park in Toronto where ablebodied kids can play with children who have physical and mental disabilities, often autism and such, so that sensory play is a very big part of their needs.
‘When we started to buy seats in New York, the arguments were angry. One member did pack a side arm.’
Brendan’s list of charitable donations exceeds 20 major causes, many of them connected to two of his main interests: the Anglican Church (he worships at the Church of the Messiah on Avenue Road as well as being influential at the University of Toronto’s Wycliffe College, an Anglican theological school), and planting trees. The University of Guelph’s arboretum has a plant sale every year. “They have these fantastic trees that are extremely rare, like pumpkin ash, blue ash, that grow in Ontario but aren’t very common,” Brendan enthuses. “So I went down in my family’s minivan—having cleaned all the junk out of it—arrived and bought one tree, then another, and another. I shouldn’t be left alone with my hobby, almost unlimited funds, an empty minivan, and no chaperone. I ended up buying thousands
and thousands of dollars worth of trees, and they had them in this huge stack and they said, ‘How are you ever going to get them in there?’ and I said, ‘One by one.’ I stacked, I think it was, 58 trees into the minivan, of about 25 different species, mostly native to Canada. I’m building an arboretum at my wife’s family farm.”
Like most workaholics, Brendan’s constant dilemma is not when, but if, to take holidays. In the 10 years since their eldest daughter was born, Brendan and his wife, Sandra, had actually never been away from them. So when his mother-in-law called in January, offering to look after their four kids for Valentine’s Day so the couple could have a night out, Brendan decided that instead they would take a holiday to remember. “I didn’t tell my wife where we were going, and even when we pulled up at the airport, she felt sure we were there to change cars or pick up a package or something, but I told her to get out,” he recalls. “She didn’t know where we were headed until they called out, ‘Last call for Paris!’ I’m not sure if she wanted to hug me, but I rather suspect she wanted to kill me because it meant, of course, that we weren’t going away for one night from her kids but for several nights.
“When we got on the overnight flight to
Paris she had a splitting headache just from the stress. She’s packed for February in rural Ontario, not spring in Paris. I had just assumed that as long as she had her contact solution and her toothbrush we could buy the rest of the stuff on the Champs Élysées. As it turned out all we bought was some art. There were a couple of paintings that had inspired me. We were in Paris for four days, and on the second night I broke out a necklace underneath the Eiffel Tower, a diamond affair—not wildly expensive but still it had some sparkle to it—so that every time people would ask her, ‘Hey, where did you get the necklace?’ she would answer, ‘Oh, my husband gave it to me underneath the Eiffel Tower for Valentine’s Day in Paris.’ You know, it’s that sort of thing that would really, really make other husbands hate a person, and that’s what I was striving for.”
The Caldwell Amigos have emerged as major players, from decades of protocols and procedures in place, as proprietors of an enterprise that makes its own rules. They meet most Sunday nights in each others’ gardens to puff their cigars and plan the week ahead. There’s no particular agenda, but at one recent meeting they spent most of the time discussing the literary guru, Aleksandr Isaevich Solzhenitsyn, and the gulag archipelago, which grew out of a conversation about investing in Russia. Sometimes Theo joins them. Brendan and his father carpool every day to and from the office. The family is strong. M