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Roles may change, as mine has in the year since the last IDA conference, but it is friendships on which the success of the investment industry ultimately rests.
Let me extend my congratulations to the IDA for arranging another outstanding program, all of it combined with good-old Alberta-style hospitality.
My special congratulations go to Ian Russell, senior vice president of the IDA, who I will introduce in a few minutes, because this annual conference is largely his handiwork.
The program this year is global in its perspective. I will frame my own remarks within that context.
TSX Group sees our future in global terms. With that in mind, we have raised our profile in Europe and Asia in recent years.
But we have not lost sight of the reality that we are a North American exchange.
It is not primarily Europeans and Asians that we face in the daily competition for listings, for market share, for data sales. It is North Americans.
The reality of that competition shapes our view of what we have to do and how we have to do it.
One, we have to do our part to ensure the Canadian market is strong and efficient, too.
And two, we have to be efficient as a company and as a market operator.
The strength of Canadian capital markets depends, and we are very clear on this, on the strength of the Canadian securities industry.
Put another way, if you don’t benefit from our success, it will put at risk our own success.
I think it is fair to say that we now have a track record that establishes in a pretty definitive way the importance we place on that.
Six years ago, Canada had one of the unhealthiest market structures in the world.
We had too many exchanges for the size of our market.
Intent on beating each other into the ground, we left foreign stock exchanges free to cherry pick our best listings and eat our lunch in terms of market share.
To turn that around, among other things we joined with the firms represented here today toward the restructuring of the industry to create two stock exchanges out of six exchanges – the senior market, Toronto Stock Exchange, and the junior market, CDNX.
With that complete, we acquired CDNX in 2001 – our first acquisition. It became TSX Venture Exchange and was a critical building block in our becoming TSX Group, and the first publicly listed exchange in North America.
More germane in terms of what we did to make ourselves a more efficient company and give Canada a more important market, consider what happened to staff complement.
When we acquired TSX Venture, we had a staff of 740 people.
We’re a much leaner organization now. We have 530 and that includes 30 who joined us with our most recent acquisition – the Natural Gas Exchange or NGX.
Running a leaner, more efficient company is not an end in itself. It’s a means to an end – the end being an efficient market for the well-being of the country and its economy, and a profitable company for the well-being of our shareholders.
In terms of the latter – giving substance to our belief that our market needs to be more efficient if Canada is to be competitive in global securities markets, we have shared the benefits of our own success with the market – with you.
By way of example, in 1999, when the consolidation of the market started, our total trading fees for a 1000-share transaction were $3.81.
Now that same trade costs $1.89 – our total fees per transaction have been falling at a cumulative rate of 16 per cent a year – each and every year since 1999.
That’s one contribution we’ve made to a more efficient market.
There are others.
The consolidation of the Canadian market – we now have one of the healthiest market structures in the world – has ensured the liquidity of our market.
We can see the result in how large trades impact prices in our market compared to other markets – in trading impact costs in other words.
The study done for Institutional Investor in 2004 found Canada to have the lowest market impact costs – a measure of our market's liquidity – on large institutional trades of any of the 42 markets they surveyed.
Liquidity is absolutely critical to our success because liquidity tends to feed on liquidity.
In addition, the Institutional Investor survey found us to have the lowest cost of trading in North America – marginally ahead of New York and substantially ahead of Nasdaq.
And it found us to have the second lowest costs in the world – fees and impact costs all in – behind Japan but way, way ahead of the London market.
Let me focus my remaining remarks on North America.
Fifteen years ago, our main competitors were NYSE and Nasdaq.
The subsequent years brought all kinds of peaks and valleys in terms of the metrics that measure our competitiveness and their competitiveness.
The internet, the tech boom and bust, the rise of ECNs, the transformation to all electronic trading, new products like the ETF’s that were first traded in Toronto – all these affected our relative strengths.
Now we are into a new surge of consolidations – with NYSE seeking to pair itself with ArcaEx and the Pacific Options Exchange, and Nasdaq with Instinet. Other moves by investment houses to take positions in smaller, regional exchanges signal an expectation at least of further consolidation.
Yet, after all this, it seems that the competition we face will be exactly what we faced 15 years ago. Our main competitors will be NYSE and Nasdaq, whoever their partners might ultimately prove to be.
In that competition, we’ve done pretty well – first to survive, then to emerge as the dominant exchange group in one of the healthiest economies in the world.
We’ve also emerged as a leading global operator of electronic marketplaces – TSX Venture Exchange, Toronto Stock Exchange, Natural Gas Exchange and a partner in Candeal, Canada’s largest electronic fixed income marketplace.
Since the future is going to be electronic, this is where we want to be.
We decided nearly 10 years ago, however, that we couldn’t afford a hybrid system any longer. Our main focus now is on continuous improvement that will keep us in the leading position we have won.
In fact, our most recent investments have improved our software so that 97 per cent of orders in the 10 busiest stock symbols are now processed in under 100 milliseconds.
On the NYSE meanwhile, they currently take more than 2,000 milliseconds on trades in their busiest symbols.,P> The effect of modernizing our market, modernizing our trading system, creating a leaner organization and a more market-oriented company, hasn’t just been the lower costs we’ve passed on to you but higher profits for our shareholders – and there are many shareholders among you as well.
In 2004, our trading volumes were up 44 per cent since the year 2000 – the peak of the tech boom. Our transactions were up 16 per cent. Our expenses were declining at three per cent a year.
But we know the challenges you and our other customers face, and we aren’t resting on our laurels. New trading algorithms are breaking trades into smaller packets so we are getting far more orders for each trade than we used to.
That consumes trading capacity. So we have to constantly invest to keep up with trends like these. And we’re doing that. We doubled our capacity in 2004 and this past spring we doubled it again.
While we are focused on efficiency and investing to produce faster trading and lower costs, we are bumping up against the artificial constraints that are the heritage of an earlier time.
I think it is well established that a system of 13 regulators is outdated and inefficient. How long must we wait before somebody grasps this bull by the horns and wrestles it down?
But the same thing applies to our own industry. Do we really need multiple reviews and audits by multiple self-regulators of the same trades conducted by the same traders on the same trading desks? Surely not.
We face new proposals regarding the internal controls of TSX issuers – controls designed to align us with U.S. regulatory requirements. Do you not think it might make sense for our regulators to pause before we get much more deeply into this to see where the U.S. is going on this issue?
Does it really make sense to put our issuers through the wringer in the name of harmonization if there is the possibility of the Americans going in a different direction?
We are also bouncing up against barriers to international growth. We have been clear in our belief that the future lies in free trading in securities with the United States and with other markets as well.
Natural gas and oil flows freely to the United States without regulatory interference from either side of the border.
Does it really make any sense for them to place their economic well-being and national security in our hands in terms of oil and gas supplies but prevent American retail investors from buying shares in the very Canadian companies that produce that oil and gas?
Not to me it doesn’t.
So, I hope IDA members will get behind the drive to reduce these barriers to the free flow of investment dollars.
Let me conclude there and perform my second duty of the morning, which is to introduce Ian Russell.
Ian is an old hand at these gatherings. Most of us know him well. I personally look forward each conference to Ian’s presentation.
For those who are here for the first time, Ian brings impressive credentials and wide-ranging experience to his job – including stints at the Bank Credit Analyst, and the Bank of Canada before joining the IDA.
He’s also a fellow alumnus of the London School of Economics.
Given his pivotal role in industry relations and representation, I can think of few people more qualified for the presentation he’ll making today on Positioning in a Changing Marketplace. Ian – over to you.
