Why the TSX and the TSX Venture are About to Change

Dear Readers,

For years, the TSX and the TSX Venture, collaboratively known as the Toronto Stock Exchange, have ruled the Canadian public markets.

But over the last five years, what was once a thriving hub of capital and liquidity has become one of the worst performing major stock exchanges in the world – literally.

The top 20 of the biggest stock exchanges in the world including those in the U.S., London, Frankfurt, Europe, Tokyo, Shanghai, Hong Kong, Korea, Italy, Bombay, Switzerland, and even Australia, have outperformed the TSX.

But that’s not the worst part.

Over the past five years, all of the top 20 biggest stock exchanges in the world have performed extremely well – many reaching new highs; all except the TSX – the only one that is now lower than it was five years ago.

This isn’t to say that opportunity didn’t exist.

In February 2013, I wrote this:

“…in the last five years, the S&P is up over 13%, the Dow up 15%, and the NASDAQ up an astounding 38%.

I’ve always said the retail market and the media is often late to the party, and that is how we’ve been able to accurately forecast market events. But when it comes to timing, no one is later than the Canadian market.

So what do we do from here?

Again, I must stress that the market is fuelled by sentiment more than fundamentals. This is especially the case when it comes to our less liquid Canadian market. The fact that there are many Canadian companies trading at cash value says it all. We’ve done nothing for the last five years but watch the world markets climb.

We need a real spark to get the Canadian markets moving again, and I am not exactly sure where it will come from at this point.

From a historical timing perspective, however, now may be the time to get involved.”

Here’s a chart of the TSX Index after that letter:


But aside from timing, nothing has truly sparked the Canadian markets. And when you extend the performance of the TSX over five years, the gains made a year after my Letter seems insignificant.

Sure, we could blame our resource market for some of this because pointing the finger is always easier.

But I don’t believe that’s the case.

Just look at Australia whose resource sector accounted for 29% of the total ASX domestic market capitalization, and 44% of listed companies by number in 2011. Australia is still in the green.

If it weren’t for Canada’s financial sector, we’d be screwed.

What do you think of TSX’s performance? Are you worried? Do you care?

CLICK HERE to Share Your Thoughts

Does Anyone Care?

I haven’t even begun to talk about Canada’s small cap market, the TSX Venture.

The TSX Venture Index fell below 500 for the first time this week, and now sits at an extreme all-time low.

It is the longest bear market in TSX Venture history – longer than all other market downturns combined since the small cap exchange was first formed nearly 15 years ago.

Over the last five years, the TSX Venture has lost more than 76% of its value. To put that into perspective, that’s equal to more than $50 billion of capital erosion.

What’s absurd is that no one outside of the industry has talked about this; not politicians, not the media, not the banks, no one.

Canada’s TSX is one of the largest stock exchanges in the world, and its small-cap market, the TSX Venture, used to be one of the best.

You would think that the underwhelming performance of one of the world’s top stock exchanges, and capital erosion from what was once one of the best small cap stock exchanges, would draw more attention.

But no one seems to care?

No one seems to understand just how bad things are.

Even scarier is that there is no end in sight for the decline.

With oil hitting new lows and a shaky commodities market, both of Canada’s primary stock exchanges are likely going lower.

And even if you’re not an investor, just consider this: nearly all of the 50 largest employers in Canada are public companies.

So it doesn’t matter if you invest in stocks or not, the fact is this: there is something inherently wrong with the Canadian capital markets.

And it needs to be fixed.

Do you think Canada’s capital market can be fixed? If so, how?

CLICK HERE to Share Your Thoughts

Over the past few years, I have written a lot of Letters surrounding this very topic, including a series from 2013:

Why the TSX Venture is Failing

How to Fix the TSX Venture

The Impact of the TSX Venture on the Economy

How Regulation in Canada Affects Both Public Companies and Investors

In these letters, despite having predicted that the TSX would do well over the next year, I mentioned many of the specific problems that would cause the overall Canadian market to further deteriorate.

Unfortunately, I was right on both counts: The TSX did do well as I predicted in my Feb 2013 Letter, but its problems would be the demise of those gains.

And that is where we are today: Canada’s TSX is now one of the worst-performing major stock exchanges in the world while the TSX Venture is in the worst shape it has ever been.

So what do we do?

Light at the End of the Tunnel

First of all, by no means am I saying that there is no chance to profit from investing in Canadian stocks. There will always be breakout stocks in any market, and it is up to us to find them.

We proved it this year with a great gold company that climbed more than 100% in the middle of one of the worst gold markets in modern history.

But the problem is that capital markets represent how an economy is doing. It represents the very essence of growth, forward progress, and innovation. If our capital market is failing while others are progressing, then we as a nation are failing.

If we can recognize this, then there is hope.

Unfortunately, there are many long-term problems that require immediate solutions if we are to survive.

I’ve talked about changing the accredited investor’s definition, removing short selling on small cap stocks, and an incredible need for public company/investor relations to change.

Most importantly, every investing platform should be a level playing field, and no investor should have an advantage over another, except in the case of hard work and research.

For example, in my Letter earlier this year, “How to Fix the TSX Venture Problems” I said:

“…we have to create a fair and transparent marketplace – not just for institutions, but for everyone. This begins with direct solutions to problems currently facing our market.”

If you haven’t read that letter, it will help to go back and read it.

And I believe that major changes are coming – even if in small steps.

Competition Breeds Change

Competition brings out the best in any market and almost always provides a better experience through affordability and innovation in a consumer market place.

With the TSX and the TSX Venture having full control of the Canadian capital market, change hasn’t come as efficiently as it should. But this year, things changed with the creation of Aequitas Innovations, a new large cap stock exchange being created to compete with the TSX by promising to provide a more fair and transparent marketplace with a focus on discouraging predatory trading practices.

The Company is spearheaded by Jos Schmitt, a man who I believe is doing something that most people are afraid to do: change.

Since the creation of Aequitas, we’re finally beginning to see some progress toward a better marketplace.

For example, Aequitas has created a proprietary way to combat high-frequency trading. The TSX has seen this and has begun to work on plans to combat high-frequency trading and make the market place a more “fair” place. Whether or not the TSX will succeed in doing so remains to be seen, but the creation of Aequitas certainly appears to have lit a fire under the TSX.

Just a month ago, the TSX addressed the problems facing our small cap market and announced it will release a “comprehensive suite of improvements” through a white paper and town-hall meetings scheduled for next year:

Via the TMX Group:


We will share key takeaways from our discussions with market participants.

TAKING ACTION on the issues with a goal to:

Significantly reduce the burden to our customers without compromising investor confidence.

Expand the base of investors financing companies and generally enhance liquidity.

Diversify and grow the stock list to increase the attractiveness of your marketplace.

IMMEDIATE BENEFITS that can be expected by market participants in the near and longer term.”

In other words, it seems that the TSX Venture is working hard to make it easier and more cost effective for public companies to list with them. I am not sure what else they have in store for us, but I am looking forward to seeing some of these changes.

Do you think the TSX Venture will make the right changes?

CLICK HERE to Share Your Thoughts

While these changes were geared towards the TSX Venture, I know the TMX Group as a whole is looking to make changes – especially with Aequitas pounding the pavement on a wide sweeping array of innovation towards a better investment platform in Canada.

But that’s not the only change that we’re likely to see next year.

The Threat is Real

A couple of weeks ago, I caught up with Jos, CEO of Aequitas Innovations. He told me they were up to something and that I would like it.

A week later, its turns out, they’ve attacked the TSX head-on with a formal complaint with the Competition Bureau of Canada, requesting a federal investigation into certain anti-competitive practices of the TMX Group – specifically regarding market data.

Via Aequitas:

“Aequitas believes that the TMX Group is using its dominant market position to maintain control over the pricing of market data in the Canadian capital markets. “In the area of market data, we believe the TMX has remained, in effect, an unfettered monopoly, leveraging its market power to charge prohibitive and monopolistic prices,” stated Jos Schmitt, President and CEO of Aequitas. “Excessive market data fees have left Canadian investment dealers with no choice but to restrict the market data access given to their investment advisors and to their retail clients.”

Unfair Market Data?

Today in Canada there are over ten different trading venues. While this breeds competition, it also makes it much more difficult for investors of all forms to participate on a level playing field.

What do I mean?

Here’s an excerpt from Aequitas‘ new position paper:

“A vast majority of investors and their advisors only have access to TSX and TSXV market data, despite the fact that a continuously growing part of the trading action is taking place on other trading venues.

When market participants receive market data on a TSX-listed security exclusively from the TSX, they are only seeing part of the picture. Without access to the whole picture, they are making less informed investment decisions.”

Here’s how it works:

Aequitas Innovations 2015
Aequitas Innovations 2015

“At first glance it seems simple, and it appears that all market participants can easily access the market data of a security listed on the TSX. A closer look, however, will reveal that retail investors and investment advisors are not seeing the full picture of market activity.

In order to see the complete trading activity of any listed security, information on trading activity across all trading venues needs to be considered, but the cost of accessing this is prohibitive.”

Simply put, if you want fair access to data, you have to pay a massive premium for it.

But how much more?

According to Aequitas’ research, and based on market capitalization, consolidated real-time TMX fees for retail investors are around 100 times more expensive than consolidated US fees.

100 times!

Take a look:

Aequitas Innovations 2015
Aequitas Innovations 2015

But that’s not all:

“On top of this, dealers also have to pay additional fees to the other individual trading venues to access their market data. These fees are typically charged for every single end-user (i.e. trader, advisor or client). With thousands of end-users, the costs become prohibitive and unsustainable for the dealers, leaving them no choice but to provide access to TSX and TSXV data only. (and not the eight other trading platforms.)”

The U.S. has over 50 venues trading the same listed securities. In Canada, we have less than 10. How are we paying 100 times more for the same consolidated information?

The answer lies in part through regulation:

“US regulators have mandated a consolidated market data solution available at a reasonable cost. Market participants, including retail investors and investment advisors, pay a low fixed fee per month and all the contributing trading venues get a portion of that fee largely based on their market share and quality of quotes.”

In Canada, things are starkly different:

“In Canada, while there is a requirement for all trading venues to send their market data to a regulated “information processor” which acts as a consolidator, market data costs are still at the mercy of the terms and conditions of each individual trading venue.

Although the Canadian Securities Administrators provided for choice and competition in trading, they have not yet addressed other potential anti-competitive behaviours, including use of a dominant position to maintain control over the pricing for market data.

When in comes to market data, the TMX has remained, in effect, an unfettered monopoly, charging prohibitive and monopolistic pricing.”

As a result:

“The anti-competitive pricing applied by the TMX has led to serious and adverse consequences.

Canadian dealers, under profitability pressure and with no regulatory requirement to provide investors with consolidated market data, only provide their retail investors and investment advisors with minimum access: market data reported by the TSX and TSXV trading venues. Despite available infrastructure, prohibitive costs are preventing retail investors and investment advisors, domestically and abroad, from accessing consolidated Canadian market data.

Most importantly, retail investors and investment advisors are often unaware of the information gap, which may lead them to “uninformed and therefore sub-optimal order entry decisions”, as stated by the Investment Industry Regulatory Organization of Canada (IIROC). Without access to affordable consolidated market data, retail investors and investment advisors are settling for less information. As a result, they are at a distinct disadvantage when making investment decisions.”

But just how unfair is this data-pricing model, according to Aequitas?

Only between 2-5% of Canadian investment advisors have access to consolidated market data for both the TSX and the TSX Venture.

Close to zero percent of retail investors using direct investing platforms have access to consolidated market data, potentially leading them to make uninformed and sub-optimal order entry decisions.

In other words, if you think you’re getting the most accurate and direct quote on your direct trading account, think again.

As I mentioned before, Canadians are becoming less trusting of our capital markets. With robot traders taking over and lack of information being provided to investors, how are we to trust our own markets?

How do you feel about this current market data pricing model?

CLICK HERE to Share Your Thoughts

Fortunately, both regulators and the TMX Group are now being forced to tackle this issue.

In a response via Canada.com:

“In a statement, TMX Group said it operates in accordance with all applicable laws.

“We charge competitively for market data, commensurate with the value of the products and services TMX provides to clients,”

Okay, so the TMX Group didn’t exactly respond with a solution. But the fact is that they are very aware of the situation. With a formal complaint now filed, backed by Aequitas, who is backed by some BIG players including the Royal Bank of Canada, I would bet that the TMX will do something about this.

From personal experience, there is no doubt it is becoming increasingly expensive to obtain fair market data across all trading platforms in Canada. This most certainly provides an unfair advantage to those who can afford to pay such high fees, such as the high-speed trading platforms that prey on the advantages of information.

No one from the TMX Group has reached out to me yet regarding this issue, so it would be unfair for me to publish their potentially contrasting viewpoints.

From the regulatory standpoint, unfortunately, “the most recent proposals from the regulators on the matter were put out for public comment in May 2014 – well over a year ago. Other than adopting a methodology for reviewing all market data fee changes proposed by trading venues, there was no further follow-up.”

Change is Coming

There are industry professionals that are working hard to tackle the many issues that currently exist.

I believe Jos from Aequitas is one of them.

First of all, his stance is obviously biased: he is creating a stock exchange that will be in direct competition with the TSX. The recent complaint against the TMX filed with the competition bureau is in place to help launch Aequitas’ CMV Connect, their solution to address the market data issues I mentioned above.

But that is precisely why change is coming: competition forces us to adapt to an evolving marketplace.

In the U.S., whose market has rip-roared over the last decade, competition has proven extremely beneficial to investors. It brings about new pricing models with benefits immediately passed down to investors at the consumer level.

Because of lower data and exchange fees, those in the U.S. pay significantly less to trade than we do. Their market has allowed for new platforms with free real-time consolidated data and even zero-commission trades – which I believe is not only extremely disruptive but opens up a whole new world of market participants and liquidity.

Imagine how much more liquidity we would have in our markets if we didn’t have to pay for trades?

Would you trade more if you didn’t have to pay for trades?

CLICK HERE to Share Your Thoughts

With so many new technological advances, trading and investing should be easier, not harder; it should cost less, not more.

I don’t expect next year to be a great year for the Canadian stock market – especially since the U.S. market may be on a path to correction. But I do expect that next year will bring great change to the Canadian capital market.

With Aequitas challenging the TSX, and regulators beginning to not only see – but admit – the many problems facing our market, there may finally be a bright side to the end of this tunnel.

The Nasdaq also just announced plans to acquire alternative trading system Chi-X Canada, which will bring even more competition to the Canadian market place.

Both Nasdaq and Aequitas are real threats to the TSX.

And that means change is coming.

Looking Forward

While 2015 had its ups-and-downs, 2016 is likely going to be an even bigger roller coaster ride.

The Middle East wars are intensifying, and a proxy war between some of the world’s most powerful nations is much closer to reality then it is away.

On the oil and gas front, the U.S. has put in plans to eliminate the law that prevents it from exporting oil; which I believe in the long-term will actually raise the price of oil and gas. I’ll explain this in another Letter in the future.

The Fed also just raised rates for the first time in nearly a decade, which means we’re going to slowly see liquidity drop. It will be some time before they raise it again, but be cautious of the ramifications.

Recall my Letter from last year where I talked about Japan’s central bank directly influencing the stock market:

“The reality is simple: Japan’s central bank will have no choice but to print more money to meet its target of 2%. That means we’ll likely see further purchases of stock to boost the market as well as other forms of stimulus.

So while many financial journalists continue to talk about bubbles (one which I agree is happening), it may not be ready to pop just yet.”

It turns out that Japan’s central bank will begin to buy more ETFs.

Via FT:

“An unexpected move from the Bank of Japan: the central bank will extend the average maturity of government bonds in its portfolio – an effort to flatten out the yield curve – and it also announced a new ETF purchase programme.

The BoJ said it would extend the average maturity of its government bond holdings to 7 – 12 years, from 7-10 years, “with a view to encouraging a decline in interest rates across the entire yield curve.”

It also established a programme to purchase ETFs at an annual pace of about Y300bn yen, in addition to the current programme in which it buys about Y3tn of ETFs.

Under this new program, the Bank will purchase ETFs composed of stocks issues by firms that are proactively making investment in physical and human capital. The new program will start with purchases of ETFS which track the JPX-Nikkei Index 400.”

In other words, the Bank of Japan, who already owns the majority of the ETF market in Japan, is about to increase its holdings – quietly taking control and ownership of large corporations.

We’re in a world where governments and central banks are becoming bigger than ever.

And given the Liberal views that many Canadians and Americans have voted in, it seems socialism is what the majority now prefers.

While 2016 won’t be an easy year for investors, I do believe that positive change is coming – at least in the Canadian captial market space.

Merry Christmas, Happy New Year, and enjoy the holidays.

Until next year.

CLICK HERE to Share Your Thoughts

Seek the truth,

Ivan Lo

The Equedia Letter

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