Over the last year, Canada’s exchanges have seen some major changes. Beginning with the merger of the country’s two western exchanges and continuing with the Quebec government’s recent approval of Nasdaq Canada, the marketplace has undergone a transformation. The emergence of the new western Canadian exchange is a story of the economic and political forces driving Canada’s new economy. It’s also the story of how two ‘small exchanges that could’ pooled their resources and formed the great white north’s first national market dedicated to the needs of venture companies.
Within a year, what started as interesting dinner conversation developed into the Canadian Venture Exchange, referred to as CDNX. It was formed through the merger of the Vancouver and Alberta stock exchanges and is part of an overall effort to restructure Canada’s exchange model.
Before opening the venture exchange in late November 1999, it had been 85 years since Canada last launched a new exchange. CDNX became the country’s first national junior exchange and, despite some grumbling from the Quebec government, the structuring of the venture market came together smoothly. Though it is still a toddler, CDNX is now creating opportunities for start-up companies as well as placing some of the less sexy resource industries on the national map.
Match made in heaven
Jim Sorensen, former vice-chairman of the Alberta Stock Exchange and now sitting on the board of directors of CDNX, tells the story of how the new venture market was born. The idea for the new exchange came out of a brainstorming session at a dinner party in Calgary, Alberta. Sorensen and John McCoach, senior vice president of corporate finance at Yorkton Securities in Vancouver, jointly organized the event. ‘We orchestrated a dinner in Calgary at the Westin Hotel and invited board members of the two exchanges,’ Sorensen comments. ‘At the dinner we discussed a number of initiatives that were geared towards changing Canada’s stock exchanges.’
Sorensen’s dinner party guests eventually became the merger steering committee and that landmark dinner, which took place in November of 1998, was followed by talks over the subsequent months.
‘We started considering how the two exchanges could work together, combine forces, create a synergy,’ says Sorensen. Both the Vancouver and Alberta stock exchanges had been looking for ways to save money for issuers and investors. They believed the idea that a national secondary market would be a good way to increase liquidity for junior companies. Once the decision was made to merge the two exchanges, Sorensen says, it was time to speak with the other Canadian exchanges about ‘the complete restructuring of exchanges in Canada.’
According to Sorensen, the idea of merging the two Western exchanges received tremendous support from both industry and government. ‘Also, we certainly had a lot of encouragement from the issuers and people who dealt with the exchanges because they all realized it would be a better, more liquid, transparent market,’ he reports. ‘Everything had a positive side and pretty much everyone within the community – and especially the governments – were working with us to create this new model for Canada.’
In March 1999, the stock exchange restructuring pact was signed, making way for the launch of the national venture exchange. The new exchange would combine the junior markets from Vancouver, Calgary, Toronto and Montreal, as well as the Canadian Dealing Network. As part of the agreement, the Toronto Stock Exchange would remain the country’s senior market and the Montreal Stock Exchange would focus on derivatives. Initially, CDNX would be divided into two locations with the trading center in Vancouver and corporate headquarters in Calgary. Since 1988, the VSE had been running as a fully automated system, so it only made sense to use Vancouver for trading.
In the coming months, however, the Quebec government got cold feet about giving over its listings to the national exchange. ‘Quebec certainly had some political questions’ admits Sorensen. ‘They don’t mesh with us totally and there were issues we couldn’t solve within the timelines we set.’
For the last decade in Quebec, the leading political party has been the Parti Quebecois, which has championed the province’s separation from Canada. In October 1999, a month before the new exchange was to be launched, the Quebec government decided the Montreal exchange would not transfer all of its listings to either the Toronto exchange or CDNX.
In order to accommodate Quebec, an addendum was attached to the stock exchange restructuring pact. According to the addendum, the Montreal exchange would keep 120 junior listings. Trading would be handled by the CDNX computer system, however, under a partition that appears to be part of the Montreal exchange.
In March 1999, the merger steering committee announced the merger of Canada’s two western regional exchanges. ‘We worked at light-speed to get it done in the time that we did,’ confesses Sorensen. ‘We signed the memorandum of understanding with the other stock exchanges and worked on the agreement we made with the ministry.’ It took seven months to fuse the two operations, and on November 29, 1999, the new Canadian venture exchange opened its virtual trading floor with 2,000 listings.
Law & order
One of the concerns in forming CDNX was how to create a well-regulated junior market. During the 1980s, the VSE had suffered from its reputation as a haven for stock scams and shady promoters. The VSE’s negative image reached its height in 1989 after a Forbes magazine article dubbed it ‘the scam capital of the world’. More bad publicity followed after a US television news crew caught a Vancouver broker offering to change a stock price in return for a big purchase order.
According to Doug Hyndman, chair of the British Columbia Securities Commission, the regulation-making for CDNX developed smoothly and was not tainted by the VSE’s dubious past. ‘If you look through the 1990s compared to other stock exchanges, the VSE was pretty good – there were no big scams,’ he says. ‘The VSE concluded years ago that in the venture securities market, surveillance is a lot more involved than overseeing large blue-chip companies.’
According to Hyndman, the VSE developed a top surveillance department that has since been adopted by CDNX. ‘The department is very effective, it is entirely electronic and they have got a whole set of rules governing transactions,’ he adds.
Two years before the new exchange was set up, the Alberta and British Columbia securities commissions signed an agreement to work together in regulating the regional exchanges. Because of this agreement, Hyndman says, it was easy to set up regulation for the national exchange. ‘We knew each other at the senior level and staff level pretty well and the whole sharing of responsibility helped us to make decisions rather quickly,’ he says. ‘It happened quite naturally.’
Also, choosing Bill Hess, the former chairman of the Alberta Securities Commission, to head CDNX, helped to establish investor trust in the new exchange. Hess, a securities lawyer by trade, built a reputation as a strong regulator. ‘Hess’ background gives people confidence. They feel they are getting a fair shake in what they are investing in,’ says Fred Ketchen, managing director of equity trading at Scotia Mcleod and former Toronto Stock Exchange chief.
Jim Sorensen says board members also view Hess as a reliable and worthy person to head the new exchange. ‘Bill came out with the best requirements and he was unanimously voted in,’ he says.
Nasdaq of the north
With a quite heavy emphasis on small-cap technology and mining issues, CDNX has enjoyed some mighty impressive gains in its first few months of existence. By early February, three months after opening, the new exchange had grown by 50 percent. This growth was mainly fueled by some hot tech options that exploded with the new national market. By late March, the exchange’s key indicator, IndexCDNX, had risen over 130 percent, and while the bigger Canadian exchanges experienced turbulence, CDNX seemed to build momentum from the beginning.
Bill Hess explains the quick-run success of the national exchange: ‘The reason the growth has been so much greater than every other stock exchange in the world is because we have had new investors.’
Sorensen attributes the exchange’s early gains to the significant boost in the technology sector. More recently, however, with the shakedown in the technology sector, CDNX has experienced the same degree of turbulence as Nasdaq has. ‘Its been up and down the last couple of weeks but its been a good market,’ reports Hess. In terms of volume, CDNX is regularly showing the combined trades of what the VSE and the ASE would have produced on a good day.
The real story behind the new Canadian exchange is how it affects Canada’s economic structure. ‘It plays an important role in assisting venture company financing, whereas before its formation that benefit was really only felt in the west,’ explains Hess. He says that the demand for start-up capital is rapidly rising all over the country: Atlantic Canada is looking for a piece of the new market, and in early March CDNX acquired the Winnipeg Stock exchange – Canada’s most efficient small exchange. ‘We have opened a Toronto office and we’re expecting it to be very busy because there is such a pent-up demand for financing small businesses in Ontario.’
CDNX’s quick expansion suggests that both investors and small-cap companies had been hungry for a national venture exchange. ‘This is sort of the Nasdaq market of the north,’ describes Ketchen. He says that there is a strong sense among the analyst community that Canada’s junior companies really needed a well-run secondary marketplace in order to flourish. And he also notes that investors also seem to appreciate having access to a national junior marketplace. ‘Basically people have gone ga-ga over the prospect of quick riches,’ he admits. ‘That is why you have all this activity.’
Jim Sorensen thinks the new exchange was necessary for the growth of the Canadian economy. ‘We created something people embraced. We gained instant credibility with the investment community by opening up a much broader playing field,’ he says. Bill Hess agrees: ‘With the national exchange we are seeing a lot of trading from people in other parts of the country as well as internationally.’
Looking ahead
For now, Hess believes that the main goal for Canada’s newest exchange is simply to continue doing what it has been doing. ‘We maintain investor confidence by the volumes we’ve had and by rolling out our services across the country,’ he describes. ‘A senior exchange such as the Toronto Stock Exchange can operate effectively out of one location, but it’s very important for us to be where the entrepreneurs are,’ he adds. ‘A lot of the companies that we have on our exchange don’t have much in the way of assets and the best due diligence that we can do is to make sure we get people involved.’
Hess says the new exchange will provide step-by-step instructions to management on how to list their companies. In this sense CDNX acts as kind of a training ground for Canadian small-caps. ‘We also realize that very few of our stocks have analyst coverage,’ so another one of CDNX’s goals is to teach newly-listed companies how to get the financial community’s attention.
CDNX has also made efforts to build a user-friendly web site. ‘If you go on our web site and look at Info CDNX, we have pages of information on all the listed companies,’ Hess informs. Investors can also look up the credentials of a company’s management team and find out what their track record is like. In the case of a private placement, users have access to the names of the individuals or institutions on the purchasing list. Within the year, Hess predicts the exchange will redesign its web site to make even it even better.
The future for CDNX isn’t going to be a bed of roses. But as long as it keeps itself scam-free by keeping a tight reign on regulation, and as long as it doesn’t lose too much of its momentum in these turbulent times for emerging growth companies, its investors won’t lose confidence in this Canadian success story.
