When stock markets merge, do investors win?
The pending deal between the London and Toronto exchanges does not please this Canadian analyst, who sees the average investor shut out.
Stock markets are behaving big cash-rich corporations.
They’re leaping into bed with one another, if you’ll pardon the expression.
It all started with one proposed merger and now there are three.
The one that is most on our minds, of course, is the merger between the London and Toronto stock exchanges.
For a blunt appraisal of this stock market merger, we turn to an editor who lives in Toronto but writes for a largely American audience.
The verdict on the merger from Ian McAvity’s Deliberations on World Markets is pretty straightforward. This Canadian doesn’t like it.
This merger, and the others in progress elsewhere, have not been made with the average investor in mind, he states.
Mr. McAvity also comments on the continuing strength of Canadian stocks and the Canadian dollar. While stocks may falter, the loonie seems to be growing in popularity.
Skeptical of benefits
The first move in the market merger mania began when the Shanghai and Australian exchanges decided to get together.
The deal has partial approval from Australian regulatory boards, but it remains a topic of hot debate in the parliament in Canberra and in columns and blogs across the country.
And the biggest of them all is now in the works — the merger of Euronext/NYSE with the German Bourse.
These two deals and the Toronto-London proposal certainly have one thing in common in Mr. McAvity’s mind. “With all stock exchanges losing market share to various trading platforms, I’m skeptical of any benefits to participants actually trading on those facilities.”
One problem that arises is a shift in practice. The London exchange runs on a different model than that of the Standard & Poor’s indexes (in the simplest terms, they value stocks with different weightings). The S&P version has been the TSX’s model for some time now, of course.
But that is far from being the only issue in this debate, says the editor.
Left out in the cold
Some may have a conspiratorial view of this market merger. Indeed, says Mr. McAvity, the deal could founder on the suspicion that “it may be used as a back door mechanism to try and create a national securities regulator that’s likely to be strongly opposed by the provincial regulatory bodies in Quebec and B.C.”
What’s more, the proposal comes under review by the same Federal panel that blocked the bid for Potash Corp. of Saskatchewan (TSX-POT). That deal was not deemed to be of “economic benefit to Canada.”
Neither is this one, asserts Mr. McAvity. “I see stock exchanges as a public utility for all market participants,” he explains.
Yet the exchanges are altering the playing field. They have been issuing their own paper, creating internal profit centers and developing high-priced special data services for high-speed traders.
In short, says this editor, “they’ve turned exchanges in many countries into private clubs with varying tiers of membership, with John Q. Public left outside in the cold.”
The editor insists he is no fan of economic nationalism, but exchanges are falling into the hands of dealer members with global relationships, and out of those of the local “plumbers” who run the trading facilities.
“High-speed traders basically get legalized front running privileges in my opinion, with their computers able to see public orders on the way to ‘the market.’ Small private investors are viewed as a nuisance who should put their money in the funds of ‘asset gatherers’ like big banks and major fund groups.”
He pulls no punches. “That’s the mentality and it sickens me!”
Too foreign
When he turns to the performance of the Toronto exchange as it now stands, Mr. McAvity is impressed with its steady rise. But not thoroughly convinced.
He points to his technical charts to show how closely linked the TSX is to the markets in New York. “If and when New York takes a hit, Canada will, too — that’s what the past 12-year history of the ratio suggests.”
On the other hand, the only question about the Canadian dollar is whether it will rise rapidly or gradually. Gradual change would make it less susceptible to “jawboning resistance” by the Bank of Canada, he says.
The rise of commodity prices has “clearly boosted Canadian economic prospects,” adds the editor. Yet “the exchange rate bugaboo” has also helped keep unemployment levels high among eastern manufacturing firms that rely on exports.
“Canada’s fiscal health and banking system are winning growing, glowing reviews relative to the rest of the old G-7 group, making the Canadian dollar a popular haven that’s ‘foreign’ but not ‘too foreign’ for many American investors,” concludes Mr. McAvity.
But the stock exchange merger would be “too foreign” in this editor’s opinion. It would accelerate the process that is turning the average investor into a second-class citizen on the markets.
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