Amongst all the confused and confusing commentary, it is a relief to read a sensible suggestion by FAIR Canada that the merger of the LSE and the TSX be taken as an opportunity to change the regulatory side of the TSX market's operation, a move that would help protect investors a bit better.
FAIR Canada says the TSX's responsibility to set and to police the listings requirements should be moved to an arms-length body (like IIROC) away from where it is now, within the TSX itself in the same group that goes out soliciting listings by companies. That would avoid the obvious conflict of interest and danger that the pursuit of listings and the associated revenue for the TSX might be done at the cost of too-loose control of listing conditions.
The second aspect of listing rules is that the merged LSE-TSX would have to decide how to deal with listing rules - e.g. whether to keep them separate or come up with a single aligned set. Making a single set of stronger/better rules would be a welcome development. The Globe and Mail's In a TMX/LSE merger, whose rules apply? by Dave Milstead explains some examples of differing LSE vs TSX rules.
Looking on the positive side, instead of the prevalent negative blather that seems to predominate these days, the merger is a good opportunity to fix existing TSX deficiencies in a way that helps investors in Canada.
Showing posts with label TSX. Show all posts
Showing posts with label TSX. Show all posts
Wednesday, 16 March 2011
Wednesday, 9 February 2011
TSX - London Stock Exchange Merger Effect on Investors
TMX group (TSX: X), operators of the Toronto Stock Exchange, have agreed to merge with the London Stock Exchange (LSX: LDNFX.PK), subject to the Canadian federal government, along with Ontario and Quebec being willing (... funny how there seems to no UK government worry about it according to the UK press e.g. BBC, UK Reuters).
So how might this interest or affect individual investors?
1) TMX as an investment - We can buy shares in the TMX, which has been doing rather well (latest Q4 results here). Will the combination do better? The merger press release talks of synergies and cost savings, as they always do, but many corporate mergers do not succeed (Deloitte says it's about half). Key issues: Will the business cultures fit? Will the technologies fit (what is the essence of a securities market if not a computer and communication/network system)? The old IT joke applies - "God could not have created the world in seven days if He had had an installed base." Blogger Larry Macdonald took a look at TMX Group last November. Wonder if he bought in and made money. The Google stock chart for TMX looks enviously enticing.
2) Inter-listings - If the combination results in there being more companies listed in Canada on the TSX as the press release suggests then that will be good for investors in Canada. Securities sold in Canada can be held in all those registered plans the federal government has created. There is no cost-effective way at the moment for Canadians to buy foreign securities to be held in registered accounts (you have to do this through an agent on the phone and pay commissions that can easily amount to hundreds of dollars), apart from US-traded securities which we can buy cheaply online. The markets in the UK and Canada will of course continue to operate separately, not as one giant market, due to the fact that the companies must comply with the local regulatory requirements, which for the TSX is Ontario/Ontario Securities Commission. Whether a company will choose to go through all the initial and on-going extra cost of registering and complying with the different local regulatory requirements is debatable.
3) Market liquidity - More investors create more trading volume and decrease bid-ask spreads aka investor costs as well as making it easier to buy/sell shares. But will more investors, presumably from outside Canada, show up in the TSX after the merger? That's not obvious.
4) Trading fee effects - If the combined LSE-TSX lower their costs and in turn lower the charges they make on trading for brokers or on listing for companies, that may increase the trading volumes and liquidity, as well as number of companies listing, both to the benefit of us individual investors. The TSX, LSE and all public exchanges are increasingly are increasingly in competition with one another and with alternative exchanges and private deal making networks (e.g. project Alpha described in Canadian Business Online by Jeff Sanford). More competition equals better outcomes for investors.
5) Investor protection - It cannot get worse than it is now for Canadian investors due to the weak laws and enforcement in Canada. To the extent that existing TSX companies decide to Inter-list and become subject to the UK's FSA regulation that will be a benefit.
From the viewpoint of the Canadian citizen, as expressed through our governments, I cannot see why exactly it would matter that, as the Globe and Mail's Boyd Erdman article (linked at the top) puts it "some key levers of control would shift outside Canada". As he also notes, many other national stock markets have already merged or been bought out, including Italy's Borsa Italiana by the LSE. If anything, a stronger, better capital market would be a more likely result for Canadian companies and investment in Canada. The government should probably encourage the merger instead of blocking it.
In short, it's hard to see any downsides for the individual investor, unless I've missed something, and there are some possible upsides. Thumbs up.
Update 15 Feb: best article I've seen on the Canadian regulatory issues being raised - here on Westlaw. Not a single word that any concerns exist in the UK. It's all about Canada. Those xenophobes who fear foreigners, especially Arab foreigners, taking over, may find comfort, or extra fear, from this December Telegraph article on the mistrust and machinations amongst LSE shareholders in Abu Dhabi, Dubai and Qatar. Another excellent Telegraph article puts the proposed merger in a global context.
So how might this interest or affect individual investors?
1) TMX as an investment - We can buy shares in the TMX, which has been doing rather well (latest Q4 results here). Will the combination do better? The merger press release talks of synergies and cost savings, as they always do, but many corporate mergers do not succeed (Deloitte says it's about half). Key issues: Will the business cultures fit? Will the technologies fit (what is the essence of a securities market if not a computer and communication/network system)? The old IT joke applies - "God could not have created the world in seven days if He had had an installed base." Blogger Larry Macdonald took a look at TMX Group last November. Wonder if he bought in and made money. The Google stock chart for TMX looks enviously enticing.
2) Inter-listings - If the combination results in there being more companies listed in Canada on the TSX as the press release suggests then that will be good for investors in Canada. Securities sold in Canada can be held in all those registered plans the federal government has created. There is no cost-effective way at the moment for Canadians to buy foreign securities to be held in registered accounts (you have to do this through an agent on the phone and pay commissions that can easily amount to hundreds of dollars), apart from US-traded securities which we can buy cheaply online. The markets in the UK and Canada will of course continue to operate separately, not as one giant market, due to the fact that the companies must comply with the local regulatory requirements, which for the TSX is Ontario/Ontario Securities Commission. Whether a company will choose to go through all the initial and on-going extra cost of registering and complying with the different local regulatory requirements is debatable.
3) Market liquidity - More investors create more trading volume and decrease bid-ask spreads aka investor costs as well as making it easier to buy/sell shares. But will more investors, presumably from outside Canada, show up in the TSX after the merger? That's not obvious.
4) Trading fee effects - If the combined LSE-TSX lower their costs and in turn lower the charges they make on trading for brokers or on listing for companies, that may increase the trading volumes and liquidity, as well as number of companies listing, both to the benefit of us individual investors. The TSX, LSE and all public exchanges are increasingly are increasingly in competition with one another and with alternative exchanges and private deal making networks (e.g. project Alpha described in Canadian Business Online by Jeff Sanford). More competition equals better outcomes for investors.
5) Investor protection - It cannot get worse than it is now for Canadian investors due to the weak laws and enforcement in Canada. To the extent that existing TSX companies decide to Inter-list and become subject to the UK's FSA regulation that will be a benefit.
From the viewpoint of the Canadian citizen, as expressed through our governments, I cannot see why exactly it would matter that, as the Globe and Mail's Boyd Erdman article (linked at the top) puts it "some key levers of control would shift outside Canada". As he also notes, many other national stock markets have already merged or been bought out, including Italy's Borsa Italiana by the LSE. If anything, a stronger, better capital market would be a more likely result for Canadian companies and investment in Canada. The government should probably encourage the merger instead of blocking it.
In short, it's hard to see any downsides for the individual investor, unless I've missed something, and there are some possible upsides. Thumbs up.
Update 15 Feb: best article I've seen on the Canadian regulatory issues being raised - here on Westlaw. Not a single word that any concerns exist in the UK. It's all about Canada. Those xenophobes who fear foreigners, especially Arab foreigners, taking over, may find comfort, or extra fear, from this December Telegraph article on the mistrust and machinations amongst LSE shareholders in Abu Dhabi, Dubai and Qatar. Another excellent Telegraph article puts the proposed merger in a global context.
Friday, 22 January 2010
The Index Finger Moves on - Shrinking TSX and Declining Index Effect
The Shrinking TSX
Another ones bites the dust. As I noted last year, the TSX Composite Index has been shrinking for years. That seems to be continuing, though at a slower pace. When Enerflex Systems Income Fund (EFX.UN) leaves the index next week as the result of a buyout (see Standard & Poors press release) the TSX Composite will be down to 210 companies, a third fewer than a mere nine years ago. One would have thought equity markets should expand over time, not shrink.
When one considers that the largest US all-company index the Wilshire 5000 Total Market Index contains about 5000 companies, it is apparent how small and thin the Canadian market is. All the more reason to diversify outside Canada in my opinion.
The Shrinking Index Effect
The index effect is the excess returns or profits from trading on a stock that is being added to a major index, such as the TSX 60, the S&P 500 or the UK's FTSE 100. The addition of a stock to an index causes its price to rise unduly as indexers (and closet indexers) rush to buy it. A neat little 2008 paper by Aye Soe and Srikant Dash from Standard and Poors called The Shrinking Index Effect showed how the opportunity to make such profits has declined considerably to the point they think "... its days as a profitable trading strategy may be numbered". They looked at five different major indices, the above three plus Japan's Nikkei 225 and Germany's DAX 30.
The paper is a good brief primer on the various indices and how they are changed. It's interesting that the FTSE 100 and DAX 30 changes are quite mechanical and predictable while those of the TSX 60 and the S&P 500 are not.
Buyers of passive index funds, which automatically buy into index changes and have to pay the higher price that follows the announcement price pop, may take heart that they are being less taken advantage of. To quote the authors: "... hedge funds and proprietary trading desks have increased their market participation in index trades to exploit this opportunity. As with any arbitrage opportunity, increase in arbitrageur activity has diminished profits." Arbitragers are not the only factor at work but the net effect is the market becoming more efficient! The chart image below taken from the study shows the big decline - the upper vs the lower line at time ED (ED means the day the entry of a stock into the index takes effect) - in available trading profits from TSX 60 changes between 1998-2003 and 2003-2008.
Of course, the efficiency process is never finished. Srikant Dash and Berlinda Liu suggest in another paper at SSRN called Capturing the Index Effect via Options, that arbitragers can continue to make large excess profits (31% on average on the S&P 500) by trading options instead of the stock itself.
Another ones bites the dust. As I noted last year, the TSX Composite Index has been shrinking for years. That seems to be continuing, though at a slower pace. When Enerflex Systems Income Fund (EFX.UN) leaves the index next week as the result of a buyout (see Standard & Poors press release) the TSX Composite will be down to 210 companies, a third fewer than a mere nine years ago. One would have thought equity markets should expand over time, not shrink.
When one considers that the largest US all-company index the Wilshire 5000 Total Market Index contains about 5000 companies, it is apparent how small and thin the Canadian market is. All the more reason to diversify outside Canada in my opinion.
The Shrinking Index Effect
The index effect is the excess returns or profits from trading on a stock that is being added to a major index, such as the TSX 60, the S&P 500 or the UK's FTSE 100. The addition of a stock to an index causes its price to rise unduly as indexers (and closet indexers) rush to buy it. A neat little 2008 paper by Aye Soe and Srikant Dash from Standard and Poors called The Shrinking Index Effect showed how the opportunity to make such profits has declined considerably to the point they think "... its days as a profitable trading strategy may be numbered". They looked at five different major indices, the above three plus Japan's Nikkei 225 and Germany's DAX 30.
The paper is a good brief primer on the various indices and how they are changed. It's interesting that the FTSE 100 and DAX 30 changes are quite mechanical and predictable while those of the TSX 60 and the S&P 500 are not.
Buyers of passive index funds, which automatically buy into index changes and have to pay the higher price that follows the announcement price pop, may take heart that they are being less taken advantage of. To quote the authors: "... hedge funds and proprietary trading desks have increased their market participation in index trades to exploit this opportunity. As with any arbitrage opportunity, increase in arbitrageur activity has diminished profits." Arbitragers are not the only factor at work but the net effect is the market becoming more efficient! The chart image below taken from the study shows the big decline - the upper vs the lower line at time ED (ED means the day the entry of a stock into the index takes effect) - in available trading profits from TSX 60 changes between 1998-2003 and 2003-2008.
Of course, the efficiency process is never finished. Srikant Dash and Berlinda Liu suggest in another paper at SSRN called Capturing the Index Effect via Options, that arbitragers can continue to make large excess profits (31% on average on the S&P 500) by trading options instead of the stock itself.
Subscribe to:
Posts (Atom)
Stumble It!
