The TSE and Its Future

Head Table Guests

William D. Laidlaw, Director, Government Relations, Glaxo Wellcome Inc. and Second Vice-President, The Empire Club of Canada; Reverend Dr. John Niles, Minister, Victoria Park United Church; Brian Dickson, Grade 12 Student, Riverdale Collegiate Institute; Gary D. Reamey, Principal, Edward D. Jones & Co.; Charles F. Macfarlane, Executive Director, Ontario Securities Commission; James R. Bullock, President and CEO, Laidlaw Inc.; Peter C. Godsoe, President and CEO, Bank of Nova Scotia; W. Robert Farquharson, Vice Chairman and Chief Investment Officer, AGF Management Ltd.; Anthony S. Fell, Chairman and CEO, RBC Dominion Securities Inc.; Claude R. Lamoureux, President and CEO, Ontario Teachers' Pension Plan Board; Barbara G. Stymiest, Chair, Board of Governors, The Toronto Stock Exchange, Senior Vice-President and Chief Financial Officer, Nesbitt Burns Inc.; and Robert P. Kelly, Vice Chairman, Retail Banking, Toronto Dominion Bank and a Director, The Empire Club of Canada.

Introduction by George L. Cooke

I am pleased to introduce as guest speaker to the Empire Club today, Rowland Fleming, President and Chief Executive Officer of the Toronto Stock Exchange, a position Mr. Fleming has held since November 8, 1994. As President of Canada's largest exchange, he is responsible for the day-today operations of the TSE and is also a member of the Board of Governors.

Mr. Fleming was previously the Deputy Chairman, President and Chief Executive Officer of National Trust Company from 1991 until 1994. Before joining National Trust, he was President and CEO of the Dominion of Canada General Insurance Company Limited. Prior to that, he was an Executive Vice-President with the Bank of Nova Scotia where he worked in positions of increasing responsibility over a 23-year career. During that time, Mr. Fleming was involved in most aspects of international, corporate, commercial and retail banking and worked in London, New York, Toronto and across North America.

Mr. Fleming has been Vice Chairman of The Canadian Bankers Association and a director of a number of public and private companies. He is a Director of the Institute of Corporate Directors and the Commercial Advisory Council of Royal LePage, a Senator of the Stratford Festival, a Governor of Junior Achievement of Metro Toronto, a Director of the Metro Toronto YMCA, as well as a former Director of the Canadian Chamber of Commerce. Mr. Fleming is on the Advisory Board of the School of Business Administration at Acadia University.

Mr. Fleming was born and educated in Dublin, Ireland and is married with two children.

Mr. Fleming, welcome to The Empire Club of Canada.

Rowland Fleming

It is both a pleasure and a distinct honour to join the ranks of the distinguished speakers who have addressed the Empire Club since its origins in 1903. Canada has evolved in so many respects in the intervening 96 years and today the attributes of tolerance, compassion and economic health distinguish us as a developed nation on the world stage.

More than ever before, we are responsive to, and involved in, the demands of a new world and it is redundant to note that Canada is a part of and heavily influenced by the dramatic changes underway in the global economy. The degree of change is not merely a focus for headline writers or abstract economic reports, or indeed speeches! We experience it in our investment performance. We reflect it in our business decisions. It is a force of influence in our daily lives.

Fundamental changes are occurring in the structure of capital markets around the world which are bound to affect us, because as is the case worldwide, economic growth in Canada depends upon the availability of capital and its efficient use. That is the TSE's role--the role of any exchange. We bring people who are prepared to provide capital to the people who are prepared to utilise it. That has been the formula for the development of Canada since the first spike was driven into the railroad. The growth and the health of our capital markets feed into the growth of our economy, making it possible to build businesses, create jobs, accumulate savings and make investments. A healthy capital market is a critical element of a healthy economy.

And just to get a sense of the TSE's role in the Canadian economy, consider this: The market capitalisation of the almost 1400 Canadian companies listed on the Toronto Stock Exchange comes to more than $835 billion--about twice as much as it was five years ago. That domestic market capitalisation is almost equal to the annual GDP of all of Canada--hundreds of billions of dollars invested in creating jobs, invested in our standard of living, invested in our future.

In just the past four years, almost 600 new companies have listed with the TSE, representing over $150 billion in market capitalisation. That's more than the annual GDP of the entire Greater Toronto Area and most large Canadian cities and provinces.

How does this primary market activity of the TSE impact the people of Canada? Essentially, it provides the basis for a growing economy. It means capital being put to work so that Canadians can reap the rewards of entrepreneurial spirit, expand their business horizons, improve their standard of living and enjoy a healthier retirement.

However, this is not a new role for us at the centre of Canada's capital markets. For over 147 years, the TSE has built up enormous assets--in infrastructure, in credibility, and most of all, in the experience, expertise and commitment of the people who work for the exchange. It has facilitated an enormous investment in the Canada of the past, the present and of the next millennium.

But the TSE--like exchanges around the world--faces new sources of competition, new challenges. Like governments, like businesses, and like individual Canadians, the TSE must respond to those challenges, must adapt and adapt quickly, or risk being marginalised.

Of course, it's not the first time that exchanges have been challenged by new global forces. In 1850 the United States was home to 250 stock exchanges. Today, it has less than a dozen. Where did they go? New technology made its impact! The telegraph and the tickertape mowed them down, transforming the NYSE from one regional market among many into a towering national giant.

Today's telecommunications and technology revolution is even more powerful--and potentially more threatening. NASDAQ was born in the crucible of the failure by other exchanges to respond and adapt. Consider the Philadelphia Stock Exchange--one of the longest-standing capital markets in North America--now reduced to the oblivion of a junior partnership with NASDAQ.

That same revolution threatens to make Canada's capital market a regional extension of New York's which would consign Canadian investors and Canadian companies to the cursory attention of a branch-plant in another country. Clearly, the TSE must become an exchange of the future, powering our national economy forward--or it will be relegated to the past, holding back much of our economy and our opportunity with it.

Recognising this imperative, the Board of Governors of the Toronto Stock Exchange has endorsed a new strategic direction to secure its place at the centre of our capital markets and to strengthen its ability to contribute to our country's growth. But before I come to our vision for the TSE, I would like to talk about how we arrived at it--and why.

First, you might ask, what difference does it make whether there is a strong TSE? What does a dynamic TSE mean to you, to us, to the country?

What does it mean to investors who over the past 15 years have tripled to 37 per cent of Canada's population? It means a wide range of listed companies to choose from for investment. It means liquidity and depth in the marketplace, which is especially important to large-volume institutional investors, like pension funds and mutual funds. It provides the critical mass that makes it possible to invest with confidence and sell with ease. It offers reliable price discovery--one of the elements of fairness and a basis of sound investment.

What does the TSE mean for investment dealers? It means a major Canadian exchange on which to serve and maintain their customer base. It means a healthy domestic market in which to play a lead role. It means being part of a Canadian market composed of peers, rather than being relegated to the fringe of the U.S. market.

What does the TSE mean for our listed companies and those seeking new capital? It means a source of capital to finance growth to create new businesses. It means a direct vehicle for attracting Canadian investors in Canada--investors who are familiar with a domestic company's name, reputation and potential. It means greater analyst coverage, and it means enhanced visibility--especially to Canadian institutional investors, who conduct more than 90 per cent of their trading through the TSE. And it provides a recognised national platform from which growing companies can expand in global markets.

For all market participants, the TSE provides an advantage that no U.S. exchange can match: an equity market-based and rooted in Canada, and focused on our needs and the needs of our economy. An exchange where our concerns are at the top of the agenda, not the bottom of the heap.

Moreover, the TSE means a regulatory framework that inspires confidence. It has built enormous experience and expertise in ensuring a fair, accessible and orderly market for all investors--compiling a track record that has earned respect around the world. In recent years, we have added to our distinction in the regulatory field, through leadership initiatives in the areas of corporate governance, in corporate disclosure and just this week a Task Force Report on new regulatory standards for the mining industry.

The TSE is important not just to the millions of Canadians who have a direct stake in it. All Canadians have an indirect stake in its health and viability, because economic growth depends upon the availability of capital and its efficient use. The TSE facilitates the formation and distribution of capital, and provides a gateway to Canada for global investors. It ignites the private sector's ability to create wealth and jobs.

Last year, an estimated 40 per cent of the world's equity mining finance was raised on the TSE--securing our place as the trading capital of an industry that accounts for almost 4 per cent of Canada's Gross Domestic Product.

The exchange also serves as the financial incubator for many high-tech companies. Since 1995, more than 50 high-tech firms have listed on the TSE, deploying roughly $5 billion in capital.

Just a few months ago we launched the S and P TSE 60, with a capitalisation of more than $400 billion, a new base to attract global investment to our economy.

These are just a few of many concrete examples of our role in bringing capital together with opportunity, to create jobs, wealth and economic security.

Some might still ask: Couldn't all these services be provided by U.S. exchanges? Couldn't we all just join the NYSE and NASDAQ?

The blunt fact is, the NYSE and NASDAQ does not want all of us. Based on the listing requirements for those two exchanges, less than 40 per cent of TSE-listed companies would be eligible to list.

No doubt, the U.S. exchanges are aggressively pursuing the biggest Canadian companies with open arms. But the rest are getting the cold shoulder. Without the TSE, more than 800 Canadian companies needing to raise capital would be left out--and the wealth and jobs they create would be seriously imperiled.

The TSE represents approximately 90 per cent of equity trading in Canada. Over the past five years, over 300 new listings came to us from other Canadian exchanges. The total initial market capitalisation of those companies totalled $25 billion--representing major capital investment in growing companies. Without the TSE as the senior equities market, companies in a position to grow beyond the regional Canadian exchanges would have no market to turn to for expansion capital. Potential investments in economic expansion would evaporate.

As Canada's financial capital, Toronto would be particularly vulnerable to lost investment and jobs. In financial services, most of the costs are for people and software--both of which are very portable. The TSE is a magnet to financial services companies. If the magnet weren't there--or suffered reduced drawing power--how many would pull away?

So who has a stake in the Toronto Stock Exchange? In the final analysis it is the people who work, invest, and pay taxes in Canada. If the TSE becomes marginalised in global capital markets, so will its stakeholders. To avoid this fate, we must have a vision and a plan to address the forces driving change.

Competition is driving change. Large public companies can attract capital with relative ease in other world markets. Investors are seeking opportunities to diversify their portfolios beyond their home markets. They want more options in the way they trade securities--and are unwilling to let national boundaries or traditional structures get in their way. As equity markets become less defined by nationality, less restricted by borders and more focused on the quality, cost and efficiency of the services available, the relevance of traditional, monopolistic exchanges is being challenged.

Specialisation is driving change. Cyberspace is creating a world of specialised electronic trading systems--last year trading about 20 billion shares in the United States. We can expect these Alternative Trading Systems to grow in Canada. In fact, the Canadian Securities Commissions are now developing regulations to govern them. These niche players provide new value to many investors. But the overall needs of investors and issuing companies--including liquidity, quality, transparency and depth--call for an efficient consolidated market, not a raft of fragmented capital pools.

Globalisation is driving change. Mergers and strategic alliances among stock and derivative markets are creating new super-exchanges. NASDAQ and the American Stock Exchange boast a combined market capitalisation of US$2.6 trillion. The trend is oblivious to national borders. In Europe, the strategic alliance between the long-time rival London and Frankfurt Exchanges is expected to pull in counterparts across the continent. The exchanges in Sweden, Norway and Denmark have formed an alliance to create a Nordic exchange. NASDAQ is forming similar alliances with other markets to connect international pools of capital into a much larger trading structure.

These factors add up to an enormous challenge: huge markets looking for international expansion opportunities and new players armed with leading-edge technological capacity and capabilities.

Technology makes a big difference. NASDAQ's advanced trading system, for example, is capable of handling trades involving up to two billion shares a day--three times its current volume. Over the next six years it plans to quadruple that through an investment in technology of more than US$600 million.

Critical mass makes a big difference for exchanges in a competitive world. NASDAQ's market capitalisation is three times as large as the TSE's. The NYSE's market capitalisation is 19 times as large.

If you want to get a sense of the impact of super-technology in attracting a large liquidity pool, just look at the numbers. In 1980, only 82 companies on the TSE 300 interlisted with U.S. exchanges. Today, 128 list in the U.S., representing 80 per cent of the TSE 300's market capitalisation. The TSE lists about 60 foreign firms. The NYSE lists more than 350. NASDAQ lists over 450.

A shift of company listings and investor capital from Canada to the United States erodes our ability to maintain a vigorous capital market that is based in Canada, for Canadians. And it means a lot of jobs flying south or disappearing into thin air.

I do not believe Canadians want to see our capital markets become a narrow dead end hidden behind Wall Street. We do not want to see all of the important decisions made by U.S. institutions that have no reason to put the needs of Canadian issuers on a par with the needs of their American base.

I do not know of a strong free-market economy that does not have a strong stock exchange. I do know that to maintain one in Canada, the time to act is now. As one of our member firms put it: "It's one minute to midnight for the TSE."

These are the reasons why the TSE Board of Governors set out to create a new vision, to chart a new strategic direction--a Blueprint for Success. We sought the perspective of member firms, listed companies, investors and regulators. We reviewed strategic alternatives.

We examined many exchanges facing challenges similar to ours, including the Stockholm, Frankfurt, and Australian Stock Exchanges. Like the TSE, all three faced the threat of lost listings and trading to major global exchanges as a result of deregulation, globalisation, and the impact of new technologies. Like the TSE, all three experienced a growing diversity of interest among their members, hampering effective decision making. And all three responded to their challenges with a combination of strategic renewal, practical initiatives, a revised corporate culture, and a restructured decision-making process. The results are impressive.

We also looked at what our direct competitors are doing.

Our largest competitor south of the border is the New York Stock Exchange, Inc., a highly profitable competitive-based organisation with a corporate-style board, which is looking to Canadian and other markets for growth.

The NYSE has a focus: large global issuers. NASDAQ has a focus: the high-tech sector, which represents 35 per cent of its market value. The Internet-based Alternative Trading Systems have a focus: speed, flexibility and low cost.

The TSE must also have a focus. It must be one that is comprehensive enough to allow us to meet the needs of all of our customers, to serve them with increased efficiency and a new responsiveness. It must strengthen our role at the centre of the Canadian equity market as the market of choice, the regulator of quality, and the consolidator of market information for all investors.

These are the goals of the Blueprint and the goals which we believe are vitally important to the overall health of the Canadian market in a global setting. The Blueprint offers a new vision and a new strategic direction for the organisation. It identifies six key initiatives--all geared to increasing liquidity, the lifeblood of any exchange.

These initiatives include a focus on providing innovative trading systems, such as the new call market for institutional investors that will improve trade execution, minimise the risks of market impact from the leakage of trading intentions, and attract greater liquidity by making it easier to buy and sell large blocks of stocks.

The Blueprint initiatives include plans to revitalise our derivatives market through the creation of new products, the automation of our derivatives trading floor, improved trading efficiency, and a focus on enhancing the contribution it makes to the overall liquidity of the equity market.

They include new ways of building the value of the TSE for listed companies, including the creation of S and P TSE 60 Index and other initiatives to attract global investors to our market.

And the Blueprint strategy calls for a focus on areas of global specialisation, leveraging our competitive position in natural resources and developing new sectoral strengths that will clearly retain the position of the TSE among the leading exchanges of the world.

Collectively these steps will attract capital, which attracts companies, which attract investors which attract liquidity which attracts more liquidity, all of which makes for a healthy and successful market.

Of course, to make any business a success in a rapidly changing environment, we must ensure our ability to execute with speed and flexibility to adapt quickly to new opportunities. The Board concluded that for too long the TSE has been relying on a 19th-century decision-making structure to prepare for a 21st-century world.

As a mutual co-operative, decisions at the TSE have always been reached through a consensus-building process. Consensus-driven models work when there is no competition and the decision-makers' interests are identical. What about when they aren't? Like many traditional exchanges, our membership has evolved from a small homogenous group to a large disparate one with differing interests--members that vary from family firms to multi-billion dollar companies. That leads to a slow, convoluted process which often arrives at the only acceptable decision, not the best one. And decisions that arrive too late to respond to competition.

Today's world demands a new governance model--one which facilitates efficient and effective responses to customer needs. One which allows us to consistently reinforce our commitment to a strong Canadian capital market. For this reason, the Blueprint calls for a dramatic shift to a competitive business model. A shift from our traditional seat-holder model based on the floor space limitations of the past to a shareholder-based model focused on the possibilities of the future. A competitive business model that will ingrain the TSE with the characteristic that is crucial to success in a tough competitive environment--discipline.

It will give us a governance and ownership structure geared to making decisions that are responsive to customers--instead of searching for an elusive consensus to satisfy the differing and often conflicting needs of a disparate group of seat-holders.

It will provide an independent board with broad representation of leadership experience drawn from listed companies and retail and institutional investors, as well as our current members. More Canadians than ever have a true stake in the health and future of the TSE. It is time to recognise that simple fact.

At the same time, it will provide incentives for the TSE to shape new products to meet the needs of customers in new ways. And it will create the opportunity to raise the capital that is necessary to push those products off the drawing board and into action.

Who will benefit from the new TSE?

Retail investors will benefit: We will be better able to meet their need for education, for information, for improved price discovery, and for new ways of interacting with the marketplace.

Institutional investors in particular will benefit from a transparent and efficient centralised marketplace that meets their trading needs.

Listed companies will benefit: Liquidity in their shares will improve, allowing us to ensure a steady stream of capital is available. We will continue to be recognised as the global market for Canadian securities.

And brokerage firms will benefit: It is in their direct interest to ensure their clients are satisfied with the efficiency and quality of the market. They will have greater confidence in their base, secure that the marketplace in which they play a lead role is a stable, dynamic one. At the same time, they will have access to a wider range of products and services that will improve the efficiency and quality of the Canadian market.

One other very large group will benefit: everyone who depends on a growing Canadian economy. Enhancing the capital markets and making it easier to fund Canadian companies create a circle of financial health that is critical to our national future.

Through the implementation of the direction charted in the Blueprint, we are confident that Canada will bask in the glow of a globally competitive exchange, rather than wilt in the shadow of a U.S. giant.

The Board of the TSE believes it is time that the TSE met the challenges of a competitive world, time it responded to the demands being faced by all organisations including its listed companies and member firms.

It is time that the TSE set its course for the 21st century. It is time that TSE stood for Tomorrow's Stock Exchange. And that time is now!

The appreciation of the meeting was expressed by William D. Laidlaw, Director, Government Relations, Glaxo Wellcome Inc. and Second Vice-President, The Empire Club of Canada.