Category Archives: Industry Insights

Transformation of CSE’s Trading Services – CSE Response to Dealer Challenges

Richard Carleton, CEO

The Canadian Securities Exchange (“CSE”) is transforming its trading services.  First, with the implementation of a new trading technology platform completed in December last year, the CSE has addressed previously noted latency and performance issues.  The new system has exceeded CSE’s expectations for the project and has been favourably received by clients.  Second, the CSE is introducing new trading features and functionality designed to address issues facing the dealer community in Canada.

Challenges faced by participant dealers

In our view, the biggest challenge facing participant dealers is cost effective execution of agency orders.

The advent of multiple market trading and the rise of the “maker/taker” pricing model have attracted numerous liquidity providers to the Canadian markets.  With liquidity incentives that were several times more generous (on a value traded basis) than US market centres, competing trading firms (often supported with sophisticated computer technology) reduced quoted spreads for actively traded instruments to the minimum increment.

Although the narrower spreads served to benefit clients trading in high turnover stocks, the cost to access the liquidity for their executing firms began to approach prohibitive levels.  These costs include, but are not limited to, exorbitant take fees, multiple ticket charges resulting from smaller average execution size, implementation and maintenance costs for order routers (for compliance and best execution purposes), access fees and market data charges for a burgeoning number of new venues, gaming strategies employed by the liquidity providers, a rising percentage of odd lot orders, and significantly increased compliance risk.  All of these factors have combined to increase dramatically the costs of execution for agency dealers.

CSE addressing the challenges

The CSE has introduced a series of measures designed to address the aforementioned challenges and is adding further functionality and features:

  • a market making programme for all stocks trading on the CSE (CSE, TSX and TSX-V-listed) was introduced in November, 2014. The key feature of the programme is that it provides automated execution for eligible agency orders up to the “guaranteed minimum fill” commitment from the market maker.  We currently have a number of firms providing odd lot and full market making services for both CSE and other market listed stocks.
  • The CSE filed for an enhancement to the GMF programme on February 17, 2017. The proposal, which may be published in the OSC Bulletin for public comment as early as March 2, is intended to increase the opportunity for GMF-eligible orders to be automatically executed at the prevailing national best bid or offer in a single trade ticket.
  • The CSE is also revising its fee schedule. The changes are intended to reduce overall execution costs for agency dealers.
  • The CSE received approval from the Ontario Securities Commission for the introduction of two new features on February 16, 2017. A copy of the OSC notice may be found at:  http://osc.gov.on.ca/en/Marketplaces_cnsx_20170216_market-maker.htm . The first component of the filing, the introduction of standard peg order types, did not attract any comments.  The second component of the filing, the introduction of market maker participation, was somewhat more controversial.  We will spend some time describing how we believe the feature should be eventually implemented, and how it is currently approved.

It is an unfortunate fact of the public comment process in Canada that the conversation with respect to securities regulation, at least from a practitioner viewpoint, is dominated by the institutional trading desks.

In the United States, there are a number of powerful and independent advocates for the interests of retail oriented investors: large mutual fund firms, independent discount brokers and regional brokers servicing a retail investor population.  All intervene on behalf of the interests of their clients.  These entities either do not exist in Canada (the independent discount brokers are all relatively small compared to their bank-owned competitors), or have elected for one reason or another not to take an active role in the policy formation processes.  Consequently, it has been a challenge for the CSE to rally broader public support for enhancements to its offerings for agency clients.

It is also a difficult process to appropriately balance, in a way that satisfies all of the stakeholders in the market, the privileges afforded a market maker with the obligations that they are providing to the marketplace. In our experience, any offering from a marketplace that increases the likelihood of execution of an agency order against the market maker’s book, is more likely than not to be opposed by parties looking to increase their ability to trade against these orders in the open market.

Under the CSE’s original proposal, market makers would have been entitled to participate against up to 40% of the volume of eligible marketable orders.  The current guaranteed fill requirements would remain in effect, such that if the booked volume at the bid or the offer was insufficient to satisfy an in-bound order, there is no elective participation. The market maker is obligated to fill the remaining volume. This restriction to trading with only eligible orders was the most problematic for commenters and the regulators.  Since the market maker was not “obligated” to participate with “all order flow”, the feature was characterized as a “benefit” to the market maker.  The fact that the feature would result in reduced costs and superior execution quality for agency clients and their executing dealer, was not, in our opinion, given sufficient consideration.  As a result, the CSE’s original proposal would not have been approved.

In order to avoid undue delays in delivering the other features that have already been approved, the CSE has determined to deliver a modified version of the participation programme. As set out in the OSC Notice, the CSE participation programme will now allow the market maker to interact with all orders less than the GMF and would limit market maker participation to a maximum of 40% of the GMF commitment.  These features are consistent with market maker participation available on other exchanges in Canada.

Although this is an imperfect result, we will be working to overcome the objections of a subset of the trading community as well as engaging with OSC Staff in the coming weeks.  Our objective is to provide Canadian dealers with a cost effective means of executing large volumes of client orders, while providing appropriate guarantees of both best price and best execution for their clients.  These goals are clearly in the best interest of the public and the market as a whole.

Respectfully,

Richard Carleton

Chief Executive Officer

Market Structure Issues Affecting Small‐Cap Issuers: CSE Submits Comments to IIROC

As part of a number of initiatives undertaken this year  to enhance the stability and integrity of Canadian capital markets, the Investment Industry Regulatory Organization of Canada (IIROC) sought comments from capital markets stakeholders on factors impacting micro and small-cap issuers.

With well over 300 publicly listed small-cap securities, the Canadian Securities Exchange (CSE) serves as an important bellwether for forces impacting this vital segment of the securities ecosystem. As such, the CSE provided its perspectives on a number of regulatory as well as operational items that could provide direction on improving capital formation for stakeholders in the micro and small-cap space.

Below is the full text of the letter submitted to IIROC detailing the CSE’s comments. All submissions, when published, will be available on IIROC’s website.

Introduction

The Canadian Securities Exchange (the “CSE”) is pleased to submit its observations and recommendations in response to the Investment Industry Regulatory Organization of Canada’s (“IIROC”) request for proposals on “Market Structure Issues Affecting Small‐Cap Issuers”.

The CSE’s view is that many of the market structure concerns voiced by small‐cap market participants over the last number of years are symptoms of a fundamental problem: an absence of buyer interest and participation in these markets. Some of the reasons for this challenge are beyond the control of industry participants. The collapse in the price of many commodities during the current business cycle, and unfavourable demographic trends in the retail investment population who have historically participated in these markets are a big part of the challenges faced by issuers, advisors and marketplace operators in the small‐cap space. The CSE believes, however, that there are a number of measures that can be adopted by the industry to address issues under our control. These measures fall into two broad categories:

  • Address the capital formation challenges faced by issuers and their advisors, and reduced participation rates from retail investors in initial finance transactions. The exempt market in Canada should be enhanced with measures similar to those now in force in the United States as a result of the implementation of Regulation A+ of the JOBS Act. Doing so would provide a bridge between the attempts to create a crowdfunding regime for very early stage capital raises and the traditional prospectus‐backed IPO market. The current exempt market, which provides the majority of small‐cap finance, is by its nature limited in scope in both the dollars that can be invested and the number of potential participants. The CSE believes that many of the market structure mechanisms proposed will not provide any long term relief to the problems identified, unless the buyer problem is addressed. Unless new classes of market participants are able to enter the small‐cap finance and trading space, we are concerned that technical changes to the trading rules will not bring about the anticipated benefits.
  • In the second part of our submission, the CSE will provide its views on many of the issues raised by industry participants and cited by IIROC in the Request for Proposal.

Importance of Canada’s Small‐Cap Finance Community

It bears repeating that Canada’s early stage public capital market is an important component of the country’s economic success. Entrepreneurs from every industry group have benefited from their ability to finance business development from the public markets at a lower capital cost than would be available from private sources. Where businesses in other countries have to rely on expensive and restrictive private sources of finance (e.g. bank debt, private equity, venture capital funds), Canadian companies have been able to raise billions of dollars at reasonable cost from public market investors. Canada’s investment dealers and marketplace operators have supported this primary capital formation process with fair, efficient and accessible secondary market trading services. Investors from all income brackets have historically been able to share in the growth of the country’s capital markets through their ability to buy and sell small‐cap stocks. The liquidity, and resulting price discovery efficiencies, that these investors contribute to the market has further supported the ability of companies to raise needed capital from the public markets. Unfortunately, the traditional primary and secondary market model for small‐cap finance in Canada has broken down. The days of an IIROC member investment dealer advising a company and assisting on the placement of its initial distribution of securities under an offering document, while supporting secondary market interest through the provision of research coverage and investment advice via a network of advisers are irretrievably past. The vast majority of funding raised by companies listed on the CSE and the TSX‐V now comes from the exempt market. Advisors at IIROC member investment dealers are increasingly less likely to recommend client participation in both primary and secondary market small-cap investment. Secondary market trading activity comes principally from retail investors through the discount brokerage networks. Dealers are committing less and less capital to market making and other proprietary secondary market trading activities. While we will leave it to the practitioners from the sell side to enumerate the reasons for the shift, we do not believe that any of these trends are positive for the Canadian capital markets.

In current small‐cap finance, the principal source of exempt market funds is the accredited investor exemption. Covering a minute percentage of Canadian households (approximately 1 – 2%), accredited investors account for a major percentage of funds raised by CSE issuers. The CSE believes that to address the capital formation challenges faced by small‐cap issuers, access to the exempt market should be expanded. At the same time, the industry needs to collectively come to an agreement as to the role that new forms of investor engagement can and should play in the capital formation process. Many registrant firms, citing compliance concerns, will not permit their advisors to use social media to communicate with clients and a broader investor audience. Small‐cap issuer firms and their advisors are also reluctant to employ social media for similar reasons. Given that an entire generation of potential market participants consume news and information via social media sources, the industry is cutting itself off from the future. Accredited investors skew older than the population as a whole (which is itself aging rapidly), and ultimately represent a declining pool of market participants. Unless we can collectively engage a younger, less affluent, group of market participants, the public capital formation process is doomed to irrelevancy.

Small-cap investors may need to brace for lower returns There is also an important public policy reason for broadening participation rates in the small‐cap finance and trading markets. A report published by the McKinsey Global Institute on May 2, 2016, (Diminishing Returns: Why Investors May Need to Lower Their Expectations) suggests that investment returns in developed markets in North America and Europe are likely to be significantly lower in the coming 20 years than they have been in the preceding 30 years. The two principal reasons cited in the study are the prospects for lower overall growth in these economies and the lack of population increase. If this forecast is accurate, investors seeking higher than developed market returns will have look to investments in the small‐cap markets. If we continue to, effectively, limit participation in the small‐cap capital formation process to the accredited investors, we are denying the opportunity to access these investment opportunities to the vast majority of potential investors. This harms not just the investors themselves, but the companies looking to raise growth capital from the public markets.

To build a new constituency of younger and engaged small‐cap market participants, the CSE recommends the following steps be taken across the industry:

  1. Harmonize the crowdfunding rules across Canada. The current crowdfunding regime in Canada is too complicated: the steps required to ensure a compliant national offering are extensive, and eat into the modest potential proceeds of the process. The likelihood of a company unintentionally breaching the guidelines in a particular province or territory is high. The fragmented rules also raise compliance costs for portal operators hoping to conduct business across multiple jurisdictions. Economies of scale are more difficult to achieve, raising capital costs for their clients. The United States, in contrast, has a set of rules in place under Regulation A of the JOBS Act that provides for a clear set of guidelines across all 50 states.
  2. Implement a new means of prospectus‐exempt financing modelled after Regulation A+ of the United States JOBS Act. Unless we extend participation in the exempt market beyond the accredited investor exemption, the small‐cap finance industry will fail to gain the engagement of a new generation of potential investors. The success of television shows like “Dragon’s Den” in Canada and “Shark Tank” in the United States suggests that there is an appetite for entrepreneurial stories that extends far beyond the small segment of population represented by the accredited investor class.
  3. Regulation A+ permits issuers to promote participation in their fundraising initiatives through a variety of non‐traditional means. Canadian regulators, investment dealers and advisors, and small‐cap issuers have to come to grips with appropriate uses of social media and other communications media to engage with the broader investor population. As an exchange, the CSE can provide guidance and specific training to its issuers in these opportunities, if the rules are well understood.

If we are unable to engage a new generation of investors, whose numbers and potential investment resources are significantly larger than the few accredited investors relied on by the industry currently, then all of the technical measures designed to improve the operation of the small‐cap markets will prove irrelevant. While IIROC cannot alone implement any of these changes, the organization can be an important focal point for reform in assisting the industry in developing new means of engaging with the broader investing public.

Marketplace Operation Issues

As indicated in the introduction, the CSE has a number of views and comments on the marketplace operation issues cited in the Request for Proposal.

Short sale proposal

The CSE is sympathetic with issuers and their shareholders who believe that the current short sale rules, combined with the absence of buyer interest in many small‐cap stocks, provide a low risk opportunity for short sellers to profit. Allowing the short sale to create a new downtick, particularly in the case of sub‐10 cent stocks, results in a material decline in the market cap of the company. When the short position is covered, ideally (from the short’s perspective) at a still lower level, an even larger slice of the market cap of the company has disappeared. This is particularly frustrating for companies that are attempting to conduct a financing. The ability of companies to raise funds at greater than 5 cents per share (the minimum threshold for TSX‐V and CSE‐listing companies absent an exchange exemption) can be compromised by short selling pressure in the secondary market.

The CSE is prepared to support rule changes that will place restraints on the ability of short sellers to create a downtick on the initial trade. We do not support, however, a re‐institution of the former rules that were enforced at the trading system level of the exchanges. Bringing back the former rule, which involved a significant amount of programming and testing, would take a lengthy period of time to institute. In our view, the rule should be that a declared short sale may only be entered when accompanied by the “passive only re‐price” tag. The tag will enforce the requirement that a short sale has to be booked; it may not cross the spread to execute. If an order crosses the spread to trade against the short sale order, the likelihood is that the new sale price will represent an uptick from the last traded price. All of the Canadian markets currently support the passive only re‐price tag; instituting the new rule would not be held up by a lengthy technical implementation process. We would also support the standard exemptions (for example, exchange appointed market makers should be able to sell short without restriction), as were present in the former short sale rules. At first blush, we do not believe that firms using the “short mark exempt” tag (“SME”) should be exempt from this requirement. In general, these firms are computer aided, proprietary, high frequency trading firms that are not generally active in the small‐cap markets.

Settlement discipline

IIROC should examine whether firms are properly enforcing the short sale covering requirements. As a general rule, small‐cap stocks are not available for loans, nor are they margin eligible. For many stocks, there may be no assurance that a short position may be covered within the time limits required under UMIR. If firms are not enforcing the requirements properly, the economics of predatory short selling activity would improve to the detriment of the issuers, their shareholders and the broader market.

Tick size

We do not believe that modifying tick size for low priced stocks would have a material impact on liquidity or price continuity. The experience of the broader market when decimals were introduced suggests that overall liquidity would not change, but order size at each increment would decrease. Because more price levels would have to be accessed to fill orders, volatility would increase by reducing price continuity. Our experience for CSE‐listed stocks is that, in any event, the typical spread for the majority of small‐cap stocks is not at the minimum half‐cent or penny increment. Proponents of smaller tick size suggest that the measure would reduce the impact of short selling activity. In the CSE’s view, instituting the “passive only” requirement for short sales would have a more powerful impact on the identified problem. Proponents of larger tick size suggest that their plan would increase potential profits for market makers and other firms committing capital to trade a particular stock. The CSE suggests that IIROC and industry members study the results of the “Tick Pilot” in the process of being implemented in the United States before considering amendments to UMIR’s tick size provisions.

Board Lot size

Increasing board lot size is cited by a number of parties as a means of restricting short sale activity in small‐cap stocks. As described above, the CSE believes that the better measure is to prevent a short sale order from crossing the spread to execute the trade. Increasing the board lot size would have a significant negative consequence: many retail shareholders might find themselves holding an odd lot position in the stock. Odd lots receive no price protection in the secondary market, and, as a result, may trade at any price without violating UMIR or the national instruments. Execution quality for odd lots is a regular customer service issue for dealers: the CSE often deals with complaints from clients on the price that they received when trading an odd lot. The CSE has appointed odd lot market makers to address this concern, as odd lots orders are now automatically executed against the market makers book at the bid or the offer price. The fact remains, however, that handling customer odd lot orders effectively is a challenge for retail oriented investment dealers. Expanding the number of client odd lot orders would be harmful to the goal of increasing investor confidence in the fair and efficient operation of the small-cap markets.

Electronic trading

A number of industry participants have cited the advent of electronic trading as a major disruptor to the fair and efficient operation of the Canadian small‐cap markets. The CSE has supported research efforts by IIROC and other entities over the years aimed at identifying the impact of market participants who use computer driven strategies on the markets. From a CSE perspective, we have not been able to identify significant participation by these traders in the small‐cap names. We know these accounts from their activity in the highly liquid Canadian large‐cap stocks that the CSE posts alongside its listed companies. The CSE is in a position to say that these firms are not active in the CSE‐listed market. In general, the small‐cap market is simply not liquid enough to support strategies which effectively require the trading account to be flat at the end of the day.

Day trading activity

An area that has not been carefully studied to date is the impact of so‐called “day trader” activity on the operation of the small cap markets. Distinct from the high frequency trading firms, the day traders are generally individuals trading from their own account through a small number of firms established specifically for the purposes of supporting this kind of trading activity. Although these individuals may use computers to aid their trading, they do not rely on low latency strategies to achieve their trading goals. They also, unlike the high frequency traders, appear to be prepared to hold significant positions in a particular stock over a period of days. The CSE would welcome further study of the activities of these day traders, and encourages IIROC and the securities commissions to encourage this effort.

Conclusion

The CSE thanks IIROC for the opportunity to discuss these vitally important issues in an industry forum. As we have stated throughout this paper, our basic concern is that modest reform to the trading rules will not address many of the issues cited by market participants in the current state of the small‐cap markets. Unless the industry, which includes IIROC, the provincial securities commissions and (shortly) the CCMR, regulated dealers of all types, advisors, and issuer companies, is able to develop a model capable of engaging a new generation of potential investors, all of our mechanical changes to the markets will not produce the intended results. The CSE supports the development of a new, significantly broader, exempt market with two key components:

  • harmonized crowdfunding regulations across Canada, and
  • a new category of offering modeled after Regulation A+ of the United States JOBS Act, enabling companies to raise larger amounts of capital from a broad group of potential investors

Alleviating the Funding Crisis for Junior Companies: An Interview with Richard Carleton

Without question, Canadian junior and small-cap companies looking to raise public capital are facing what many consider to be a ‘funding crisis’.

Many of the headwinds facing these companies are driven by macro-economic factors, such as slowing global growth or pressures on commodity prices however that is only part of the picture. There are also a number of policy-related and structural realities of the Canadian capital ecosystem that are adding to the growing list of challenges that junior firms must try and overcome in order to raise investment capital at a reasonable cost.

Earlier this month Richard Carleton, CEO of the Canadian Securities Exchange, sat down with Jim Goddard of HoweStreet.com to discuss the nature of the funding crisis facing entrepreneurs seeking to raise investment capital, with a specific focus on the role that the CSE is playing to help provide a desperately needed solution.

Over the course of the interview, a variety of topics were covered including how regulatory decisions and recent economic conditions are impacting the Canadian independent broker dealer community; the emergence of crowdfunding; the current debate on the uptick rule and whether or not short selling should be allowed on junior/small-cap stocks and how the CSE is working to fulfill its mandate of providing cost-effective access to capital for publicly listed companies.

While the interview covers a lot of ground, one of the most compelling points is the possible landscape that could confront Canadian companies looking to raise capital should current conditions persist.

Citing the example of challenges faced by smaller investors not being able to widely participate in deals in the US, Carleton stated that by enabling individual investor participation in early-stage capital investments here in Canada, investors have the opportunity to  “profit in the growth of the Canadian economy and to help support the entrepreneurial spirit of individuals who create wealth for the country.” At the moment, however, more clarity is required on the exact mechanism that best serves this goal.

To listen to the full interview, click the video below and if you have any viewpoints on the current climate for raising capital, leave a comment or tweet your thoughts to @CSE_News.

 

Continuing to Deliver: An Interview with CEO Richard Carleton

CEO of the CSE, Richard Carleton at CSE Day Toronto, Spring 2015
CEO of the CSE, Richard Carleton at CSE Day Toronto, Spring 2015

Earlier this month, Canadian Securities Exchange CEO Richard Carleton sat down for an interview with Peter Murray of Kiyoi Communications to discuss the latest developments at the CSE.  Among the topics covered were the performance of the CSE in 2015, the expanding international profile of the CSE, the landscape for early-stage firms raising capital as well as the upcoming enhancements to the CSE.

Below is the full text of their interview. (Questions from Peter Murray have been placed in bold for clarity):

1. Let’s start with a review of 2015 in general. The Canadian Securities Exchange issued a press release recently highlighting continued growth in issuers listed, trading volume and other key metrics of performance. Can you comment on these and is your success a sign of companies finding that financing and other business activities became somewhat easier last year?

Actually, I think it is an article of faith in the industry that it is more difficult at the moment to raise public capital than it has likely been in a generation. And that is not just for companies that operate in the commodities space — given what we’ve heard from the entrepreneurial community it has been a challenge for companies in all sectors to raise capital over the past 12 months.

That is why I believe it is important that despite those difficult conditions we grew considerably last year over the record pace we set in 2014. We had the strongest year ever in terms of trading volume and grew the issuer base by 20%, among other achievements. I think the underlying message of the exchange, which is that we work with a broad number of industry participants to deliver the lowest cost of public capital, really is resonating with the entrepreneurial community. And frankly it is perhaps as a result of the difficult times that we have seen our business continue to grow.

2. It was encouraging to see several companies based in the United States make their public trading debuts on the Canadian Securities Exchange in 2015. Why did they choose the CSE over the alternatives and how is the listing process different for a company domiciled outside of Canada?

As with a Canadian company, an international company has to become a reporting issuer in one of the Canadian provinces before they qualify to list on the CSE. That is accomplished in one of a variety of ways, which can include an offering or non-offering prospectus. At some point in the not too distant future there will be the opportunity to do so via an offering memorandum. There are also the traditional techniques of reverse takeovers and asset purchases that have been used in Canada for years for private companies to become public.

For US companies in particular, I think it is fair to say that regulatory costs and civil liability burdens have put a significant hole in their early stage public capital markets. Much of the early stage capital is coming from venture capital and private equity sources. Companies look at the public market as an exit, not necessarily as a means of raising growth capital. So, when people who need to raise from $5 million to $50 million to build a company understand that you can do that in the public markets in Canada, it becomes a very attractive option.

Additionally, I would point out that entrepreneurs who take their companies public can often retain more control over the future direction of the enterprise than if they accept investment from a venture capital or private equity firm. You often see venture capital and private equity investors exert a very heavy hand on the future direction and management of businesses. From a cost perspective and that of the ability to control your destiny, people around the world find Canada a very compelling place to raise growth capital.

3. Can you give us some feedback on your interaction with issuers in 2015? And looking forward, what do you sense their goals and expectations are for 2016?

Let me start in more general terms by highlighting the results of a series of events we instituted in 2015 called CSE Days. These took place in Vancouver, Toronto, Montreal and New York. We invited issuers from each of the Canadian cities to spend a day with us talking in the morning about issues of specific interest to listed companies. We also focused on helping companies improve their presentation skills by having coaches work with their executives. We concluded the day with a mixer event where the corporate finance community was invited to meet the issuers and the keystone was the companies delivering two-minute pitches to the audience. Our issuers universally found these days to be helpful. They also found it worthwhile to meet not just their peers in the CSE issuer group, but to be introduced to a broader cross-section of the advisors and corporate finance professionals working in each city.

As far as what issuer goals and expectations are for 2016, I don’t think anybody is expecting conditions to change dramatically for the better in the commodities markets. The belief seems to be that it will continue to be a challenging environment for early stage companies of all kinds to raise capital. That being said, it is abundantly clear that there is more investor interest in technology, biotechnology and biopharma undertakings. Through the applications we are receiving we see what seems to be a general rotation of investor interest into those sectors.

4. Are there any other key developments from 2015 to highlight?

One of the first things the Canadian Securities Exchange decided it had to deliver was full electronic access to all of the discount brokerages operating in Canada, given that retail investors play such an important role in junior capital formation. It actually took until spring of last year to bring on board the last of the bank discount brokerage firms. And we saw as each of them came on over the last couple of years, significant enhancements in both the trading activity and market quality. That was a really important milestone, not just for the organization but for the issuers, and one I am pleased to say that we finally completed last year.

5. As we enter 2016, what are the trends you hear from the investment community, and how will these affect the CSE and its issuers? How can the CSE influence those trends?

As we start 2016 there is no shortage of concerning news. I recently heard Ian Russell, President and CEO of the Investment Industry Association of Canada, present the results of his organization’s CEO survey conducted in November, where they spoke to almost 200 of the chief executives of the registered investment dealers in Canada. The picture they painted was quite bleak. They anticipate that costs, chiefly driven by regulatory initiatives, will outstrip any revenue growth, and that there will continue to be a large number of independent dealers in financial distress as a result of difficulties in traditional strengths of the Canadian economy.

In working with that community we continue to look for ways to reduce their cost of operating wherever we can, to try to bring more business opportunities to the dealer community and ideally lower their cost of operations.

There are definitely things we can do as an exchange as well and international initiatives are a good example. When we attract companies from overseas to list in Canada, they are going to use Canadian dealers, lawyers, accounting firms and investor relations professionals to manage their go-public process. So we are bringing net new business opportunities to the local community.

In addition, we certainly are going to be part of the industry discussion about ways to try to improve the trading process in a manner that protects enterprise values for issuers and their investors.

6. Let’s discuss one of your international initiatives. The Canadian Securities Exchange signed a Memorandum of Understanding with the Taipei Exchange in November, and this comes on top of a close working relationship with the OTC Markets group in the United States. What benefits are there to the exchange itself from such international relationships? How about for issuers?

Really, the two questions are intertwined. We find that when companies list in jurisdictions in addition to Canada and have raised money in those jurisdictions, their liquidity profile improves overall. We see tighter spreads and deeper markets for domestically listed companies that are also quoted on the OTC market in the US or Frankfurt in Europe.

Many Canadians aren’t aware that Taiwan is a very dynamic economy heavily involved in precision manufacturing. Taiwan has a sophisticated material science community and in fact enjoys a large positive trade balance with the People’s Republic of China.

The issue that business people in Taiwan have, which is very familiar to Canadians, is that notwithstanding that expertise, it is a relatively small economy, with a population of some 22 million.

As a result, Taiwanese companies are looking for access to the global economy and over the years, for a variety of reasons, have looked to the United States for public capital and to establish that North American presence.

The CSE has always had a strong proposition for companies looking to access North America but at a significantly lower cost and regulatory footprint than they would see in the United States. We had an opportunity to meet with a variety of members of the Taiwanese financial community, including the Taipei Exchange, which is the medium and small enterprise exchange there. We have agreed to compare notes and look for opportunities to promote our issuers in the Taiwanese market, while also searching for opportunities for issuers on their market to potentially list in Canada and obtain access to North America.

For our issuers it is really the same thing. Taiwan has a sophisticated marketplace which is prepared to invest in early stage stories, especially in the technology space. We have a lot of companies that are looking to obtain an Asian presence, and just as we are a low-cost alternative to the United States, there are a lot of advantages for companies to use Taiwan as their stepping stone into the Asian market.

7. The regulatory landscape is constantly developing. Anything to comment on with regard to change at the CSE or ongoing collaboration with regulatory authorities?

We will be publishing proposed changes to our listings criteria in the next few weeks. Keep in mind that we have not amended the thresholds to qualify for listing since the material was originally filed with the Ontario Securities Commission in 2002. We will be raising the bar, but I don’t think the new standards would have had an impact on companies we have listed over the last couple of years had they been in place when those companies applied to us.

We will also likely introduce continued listing requirements that will entail certain enterprise value, size and business activity with the notion that the companies listed on the exchange must have a workable business plan and sufficient capital on hand to fund the programme for a reasonable length of time.

Another initiative is cooperation with the market-making community in Canada to see how we can incent their participation in our markets to a greater degree than happens currently. This will be with a view to ensuring there is a meaningful, two-sided market for every security listed on the Canadian Securities Exchange. It is a real challenge for junior markets – and this is true around the world – to provide for appropriate levels of liquidity for early stage companies, but we have a dealer community in Canada that is working with us to come up with solutions.

8. How do you continue to define the CSE in 2016? How does it differentiate itself from the other exchanges that small-cap and/or early stage companies might consider when they are thinking about going public?

It may sound like a cliché, but we always bring everything back to our overall mission, and that is to deliver the lowest cost of public capital to entrepreneurs looking to tap the Canadian equity markets. With that very clear mandate in mind we can measure all of the activities we are contemplating and if we are making progress in that direction then we know we are on the right track. We believe that not just given our fee structure but the overall cost structure for companies listing on our exchange, that they are in fact achieving the lowest cost of public capital as things stand currently.

We also need to continue to emphasize that the CSE serves entrepreneurs and that we have built an ecosystem that puts them in the middle. We are an independent exchange guided by the voice of the entrepreneur and that truly sets us apart.

Frugal Fare, Intellectual Feast: Challenges to Innovation for Small Cap Firms with Jeffrey MacIntosh

Macintosh_web
Professor Jeffrey MacIntosh, Toronto Stock Exchange Chair in Capital Markets Law at the University of Toronto

Innovation is a key component of a competitive economy. Often, however, that innovation also requires taking risks. Many small cap firms take on the challenge and risk of finding innovative solutions to problems facing the world today and in the process help raise the wealth and well-being of their host country. What then, is the appropriate role for Government to play in facilitating innovation from entrepreneurs, especially against the current challenging environment for public small cap firms?

This and other fascinating issues related to innovation in Canada will be discussed at an event (now sold out) co-sponsored by the Canadian Securities Exchange and the University of Calgary’s Faculty of Law. Entitled “Frugal Fare, Intellectual Feast” the session will certainly provide both. The keynote speaker, Professor Jeffrey MacIntosh, is the Toronto Stock Exchange Chair in Capital Markets Law at the University of Toronto and is a thought leader in the conversation on innovation policy within Canada.

In particular, MacIntosh’s talk will highlight the Federal Government’s 2011 report Innovation Canada: A Call to Action and the impact to small cap firms of Government policy shifts regarding the Scientific Research & Experimental Design (SR&ED) tax credit program.

The event will take place at the Metropolitan Centre in Calgary on January 15th from 11:45am to 1:15pm.

For additional reading on MacIntosh’s perspectives on innovation in Canada and SR&EDs, the following links may be of interest.

Following the Money: Panel Discussion on Raising Capital in Canada

If there’s one thing common to companies of all sizes and structures, it’s that they all need capital to grow and thrive. The ecosystem of how and where raising capital takes place, however, has recently been undergoing rapid evolution.

Whether or not this ecosystem and its stakeholders are moving in the right direction was the central theme of a panel discussion at the 2014 Canadian Investor Conference entitled: “Financing Methods: Where is the Money?”

Organized by Cambridge House International in Toronto, the panel included distinguished members from across the investment industry landscape and was moderated by BNN anchor and reporter Andrew Bell.

The panelists included the CEO of the CSE, Richard Carleton; President of the TSX Venture Exchange, John McCoach; President, and CEO, OTC Markets Group, Cromwell Coulson; President and CEO of BoardSuite, Oscar Jofre; and Co-Founder and Managing Director of WoodsWater Capital LP, David Franklin.

The discussion was a lively one offering a number of perspectives related to the availability and accessibility of capital for early-stage companies in Canada. Among the topics that the panel covered were why retail investors have been reluctant to participate in resource investment markets, the viability of equity-based crowdfunding and the challenges facing early-stage companies in raising capital.

For ease of reference, the following is a list of topics that Richard Carleton spoke to as part of the panel. To view his sections of the talk, simply click on the urls below:

As was shown in the panel discussion, there are many different options now available to firms interested in raising capital. In spite of their differing positions on which direction or platform would be the most viable, what all the participants agreed upon was the high degree of change the capital raising landscape is experiencing.

From the CSE’s perspective, the positive growth and continued interest by companies to list on the Exchange are an important signal from the market. This interest is a validation that the CSE plays an important role in helping entrepreneurial firms attract and obtain the kinds of capital required to grow their business.

While this panel highlighted the uncertainty as to where the money is, it also hinted that a marketplace that efficiently connects capital to innovators is likely to be the place where that money will be going.

Click below to watch the video of the full panel discussion.

How to Make a Market: CSE Provides Comments on Proposed Changes to NI 21-101 and NI 23-101

When it comes to running a successful enterprise, savvy entrepreneurs understand the value of being an effective listener.

This lesson is one that the CSE has witnessed time and again from the growing numbers of entrepreneurial companies listing on the exchange. It is also a lesson that has helped shape recent comments made by the CSE’s CEO, Richard Carleton, on the difficult task of crafting effective policy for current and future Canadian securities marketplaces.

Along with other major stakeholders across the Canadian securities landscape, the CSE has contributed its insights on the proposed changes to the securities rules: National Instrument 21-101 Marketplace Operation (NI 21-101) and National Instrument 23-101 Trading Rules (NI 23-101).

One of the biggest challenges common to all market stakeholders is how to respond to rapidly changing marketplaces and technologies.

Issues such as data center location and data stream distribution structures may seem innocuous to many observers however the consequences of the decisions made on these ultimately influence the answers to questions such as: Who gets market trading information first? What kind of downtime the market can expect in case of a disaster? And who can access the most detailed trading information (and for what purpose) being generated by marketplace activity?

In reviewing responses received by the Canadian Securities Association (CSA), as part of their request for comments, it is fascinating to note the degree of complexity that arises from many different opinions on so many of the issues being raised.
It is no small feat to sort through these differing opinions let alone create sound, balanced policies that address the needs of today’s marketplace while also leaving room for tomorrow’s marketplace to evolve. And yet, this is the challenge that lies before Canadian securities regulators.

For its part, the CSE continues to demonstrate its commitment to the needs of the current market as well as to the marketplace of the future. Philosophically and operationally, the CSE has strategically pursued creating a fair and efficient environment for entrepreneurial organizations and investors to come together. Reducing operating burden and reduced fees are certainly no coincidence.

When it comes to setting the rules for such a complex and dynamic marketplace, the devil is most certainly in the details. Stepping back for a moment, though, it is precisely the regulatory and administrative details that the CSE understands can be a challenge to the speed at which many companies can grow.

With some time still left before changes to NI 21-101 and NI 23-101 are finalized, there is likely room for further debate. Of the voices that have contributed to the dialogue thus far, however, there is one that warrants being listened to most carefully of all: the market. It’s a voice that great entrepreneurs tend to listen to and one that favors keeping things simple.

In Need of an Invisible Hand? Proposed Amendments to NI 23-101 Trading Rules Cause a Stir

The waters for securities intermediaries in Canada seem like they’re about to get a bit choppy.

Recently, Canadian Securities Administrators announced that some of rules that govern the transaction of securities are up for review. Specifically, amendments are being proposed to the National Instrument 23-101 (NI 23-101) Trading Rules in the areas of trading fees, data fees and most notably, the order protection rule (OPR).

Given the stakes involved, the proposed changes are almost certain to generate a spirited debate between those in favour of and those opposed to the amendments to the OPR.

One such point of view came from Jeffrey MacIntosh via the Financial Post. In his recent article, MacIntosh takes aim at the proposed NI 23-101 Trading Rules amendments and provides an insightful analysis about the potential impact they may have on the multi-marketplace model.

While there are other issues as well, OPR appears to be a linchpin, and will therefore be an important topic to continue tracking. If you have thoughts or comments on the proposed amendments to NI 23-101, we’d also love to hear them – feel free to leave a comment below.

Angels & Devils: The promise and pitfalls of crowdfunding for capital raising

The following views and opinions presented in this post are solely those of the author and do not necessarily represent those of CSE – Canadian Securities Exchange.

Crowdfunding conceptLove it or hate it, crowdfunding looks like it is here to stay. Although the debate on whether crowdfunding is ultimately beneficial or harmful is still ongoing, it appears that major stakeholders from investor groups to securities regulators are beginning to take the idea of crowd-sourced capital raising seriously.

Fairness is a Two-Way Street

Like most promising ideas, the devil, it seems, is in the details.

The spirit of crowdfunding espouses greater access to investing opportunities by smaller, non-accredited investors.  On the other hand, the rules currently in place are designed around curbing widespread participation in “risky” investments.

Striking a balance between investor participation and protection is no easy feat. This balancing act directly impacts industry’s ability to access capital while meeting disclosure requirements.

To be considered as an alternative to current methods of capital raising, crowdfunding needs to be in-line with existing controls on capital raising in a heavily regulated and highly structured capital market infrastructure. After all, the premise is that crowdfunding should increase the ‘fairness’ of market participation.  In the spirit of ‘fairness’ however, that should mean that crowdfunding doesn’t undermine the existing regulatory checks and balances put in place to protect both investors and industry.

Exactly how stakeholders will come to some consensus of balancing participation and protection is still being ironed out. One of the voices in the ongoing conversation about crowdfunding in Canada is the well-respected angel investor, Mike Volker.

A Moving Target

In a recent blog post – entitled “Crowdfunding = Going Public“, Volker presents a picture of an evolving capital-raising landscape in which crowdfunding will essentially mirror the existing landscape but in a much more fragmented way.

Volker’s article highlights the key issues confronting crowdfunding and makes several interesting points.

First, it simply is not fair to exclude investors based their economic standing (ie. the 99%), and that fundraising should be more democratic and inclusive of “non-accredited investors”. (Note the recently implemented “Existing Security Holder Exemption” is a step in the right direction).

In addition, Volker challenges the assertion that fraud is the bigger culprit for investors losing money, pointing instead to businesses failures that plague early stage companies. Simply put, the overriding risk that investors must take-on when making an investment in an early-stage company is that the company or idea simply won’t succeed.

Regardless of fairness or risk,  the main point Volker highlights is that capital is being left on the sidelines as a result of the current system. Non-accredited investors are being held out of the market, due to regulation, and not able to participate in the high-risk, high-reward investments extended to the “wealthy” 1%.

Crowdfunding Hurdles

Letting non-accredited investors participate in earlier stage deals is a key driver behind crowdfunding, but as Volker points out, implementation will be a challenge.

Three points in particular stand out:

  • Share registration and logistics of shareholder management;
  • Standardized continuous disclosure, and
  • Enabling liquidity for investors.

Volker tallies all of the above points and comes to the conclusion that innovations at the stock exchange level, similar to what the CSE has undertaken, could be a good answer to the questions that crowdfunding is trying to answer.

Specifically, with innovation, existing infrastructure can enable companies to efficiently raise growth capital from the public while enabling all investors with adequate, continuous disclosure within a regulatory framework that is fair to all parties involved.

Change is Inevitable

The writing on the wall is clear. There is an appetite by both investors and companies to connect and participate in capital flow in ways that the current system just isn’t providing. Whether this participation need is met by crowdfunding or via existing channels, it is clear that the angels and demons would be better served preparing for change rather than arguing over it.

To read Mike Volker’s full post, click here: http://mikevolker.com/crowdfunding-going-public/

Reminder: OSC Participation Fee Relief Application Deadline Coming Up

The March 31st deadline to apply for OSC participation fee relief is just around the corner.  As a reminder, earlier this year OSC Staff Notice 13-704 mentioned that certain reporting issuers (class 1 and 3C) and smaller registered companies may be eligible for OSC participation fee relief.

According to the OSC, this initiative was developed as a response to the challenging conditions faced by market participants, specifically those who experienced significant decreases in market capitalization (for reporting issuers) and revenues (for registered companies).

For reporting issuers, the fee relief may range from $160 to $13,350 and for registered firms, the range is projected to be between $235 and $17,725. The notice states that most firms will end up qualifying at the lower end of the range.

To help ensure the application process goes smoothly, it is recommended that supporting documentation be provided on how previous fiscal market cap has been calculated.

The full details on eligibility, documentation and support can be found by clicking on the following link.  There is no cost to apply.