Myths and Mysteries of Bay Street

COLONEL ROYCE:

Mr. Dean, honoured guests, madam and gentlemen

In 458 B.C. a retired Roman general named Lucius Quintius Cincinnatus left his small farm to save Rome from the barbarians and in 1961, our present speaker--a retired general--was appointed President of the Toronto Stock Exchange. Any similarity in the two cases is, of course, entirely coincidental--I hope--and I should like to say at once I have the highest regard for the stockbroking fraternity and indeed some of my best friends are stockbrokers. However, there is the story-which many of you have, of course, heardof the sweet young thing at a cocktail party who asked a grizzled old mining promoter what mining stock she should buy to which the promoter replied in astonishment "Did you say a mining stock?"--"My dear girl, nobody buys mining stocks--you just print them and sell them." May I say at once that the incident itself is undoubtedly fictitious and the views expressed are neither those of the writer nor of the Empire Club of Canada. No doubt, however, our distinguished guest today will have something further to say on this.

In 1916, our speaker enlisted as a private soldier in the Canadian infantry. By the end of 1916, 385,000 Canadians had volunteered to fight and in one day, in 1916, the British forces on the Somme suffered 60,000 casualties. We sometimes forget that Canada, with a population of barely 8,000,000 at that time, mobilized 630,000 men and of the 425,000 that went overseas, almost 60% were casualties before the war ended. As always, the infantry, "The Queen of Battles", suffered most and I am quite sure that in the distinguished record of our speaker today, nothing gives him greater pride than the fact that he was a private and then a noncommissioned officer in the Canadian infantry in World War 1.

On the return of our speaker from the armed forces in 1919, he attended Osgoode Hall, graduating with honours in 1922. From 1922 until 1939, he practised law in Trenton and Belleville; he became a Queen's Counsel in 1932 and after six years as a town Councillor in Trenton, he was elected to the Office of Mayor. Despite his many other duties and responsibilities, he was one of that dedicated group of officers who held the militia together between the wars. As many of you will recall, this was not a particularly easy time--we were called Saturday night soldiers and often a good deal worse. There was no money for anything, of course, and our regular army was minute in size and always under strength. Nevertheless, the schools and camps went on, for what the regulars lacked in numbers they made up in quality and I am sure that we of the militia will never forget the patience and tolerance of such brilliant professionals as Guy Simonds and Sparky Sparling who guided our faltering steps in those days. As a subaltern in 1934, I remember wakening a hard-worked Captain of Lord Strathcona's Horse one Sunday morning at a pretty early hour--I think it was six o'clock--after what had been a hard night for both of us and asking him if he would please give me some special instruction in map reading. As he got out of bed, he regarded me without too much enthusiasm and said "You have a lot to learn but by God you're keen." This pretty well sums up the relationship between the regulars and the militia in those days. We were keen and they were dedicated, tolerant and first class in every way. I can only hope that in this more sophisticated period, the same excellent comradeship will continue to exist between our much larger regular army and our long-suffering, depleted militia. No country in the world has received greater return on any investment than Canada has received from her niggardly investment in her reserve army. In World War I and II the regimental officers and N.C.O.'s came from the reserve and in the Korean War the entire brigade was based on the reserve army, with a reserve officer commanding it. As free men in a democracy such as ours, we have a great many things for which to be thankful and there are many ways in which we can make a contribution to our society; I submit, however, that no group of citizens makes a greater contribution than the officers and men of our militia forces. I cannot subscribe to the theory that they will not be needed in the future as they have been in the past. Nuclear warfare is so terrible that nations will shrink from it and unfortunately the alternative may well be conventional wars requiring men in the future as they have in the past.

Our speaker was mobilized in 1939 as a Major, Second-in-Command of the Hastings and Prince Edward Regiment, the famous "Hasty P's". He went overseas in the same year and served in North-west Europe, Italy and Sicily. He commanded his regiment and later commanded the First Canadian Infantry Brigade in the invasion of Italy.

He returned to Canada in 1944 as Brigadier and remained in the army for the next fourteen years, retiring with the rank of Lieutenant-General after three years as Chief of the General Staff. No greater tribute could be paid a militia soldier and no greater tribute could be paid the militia as a whole than the selection of one of its officers to fill the highest post that the peace-time army offers. There is an old saying that in time of war the army is always right and in time of peace it is always wrong and I have no doubt that our distinguished speaker today probably found his three years in Ottawa a good deal more frustrating than his wartime years in action-however, he may well be thankful from time to time that he is not there now?

In 1959, our speaker organized the Queen's tour of Canada and acted as Her Canadian Secretary. After performing this pleasant duty, he returned to the practice of law with McCarthy and McCarthy and then, in 1961, he was appointed President of the Toronto Stock Exchange. Whether the Stock Exchange knew it or not at the time, they did themselves a great service when they made this appointment--no one in Canada enjoys a higher reputation in so many fields and no one could bring greater integrity and ability to this most demanding post.

In addition, despite his many other responsibilities, he is National President of the Boy Scouts of Canada, Governor of the Canadian Corps of Commissionaires, Honorary Governor of the Canadian Association for Retarded Children and a Member of the National Council of the Duke of Edinburgh's Award in Canada.

It is my great honour to present General Howard D. Graham, Commander of the British Empire, Holder of the Distinguished Service Order and Bar, the American Legion of Merit, the French Croix de Guerre and Legion of Honour, learned in the law, one of Canada's bravest and most brilliant soldiers and the President of the Toronto Stock Exchange--truly a man for all seasons--a man whose natural modesty is entirely unjustified by the magnitude of his achievements. Gentlemen-General Graham.

GENERAL GRAHAM:

Mr. Chairman and gentlemen, I am overwhelmed, your introduction was wonderful. I didn't realize I might be on film or television. I perhaps would have switched the subject of my address to this hour would seem like seven days.

I am very glad the Chairman did recover himself and say the reference to the Barbarians and the Toronto Stock Exchange was purely coincidental. Some members of the Stock Exchange in attendance here today looked to me as if they were scarcely breathing.

I would like to say I appreciate very much, Mr. Chairman, your inviting my very dear friend Dean Gilling to come here today and bless the food, because as some of you may know Dean Gilling was my Padre when I commanded the Hastings and Prince Edward regiment, and the result of my influence on the Padre I am afraid was demonstrated by the appropriateness and the conciseness of his blessing. I have been enjoying his influence on me during the years ever since our association.

When the President of the Empire Club called me and asked me to speak, I said I didn't think I had anything of any particular interest to say, but he insisted I did, and subsequently I found out this is the last meeting of the Empire Club and I can quite understand you must be near scraping the bottom of the barrel. When I am asked to speak I, of course, wonder what would be interesting. Invariably when I would speak to such and such a group, they say what kind of stocks should you buy or tell us what you think the market is going to do. I would be a very presumptuous person if I tried to tell you what the market will do if the experts, brokers and panelists are not too good at it. I am going to make this statement without fear of apology, if you buy common stocks in a good and well-managed stable company whether they be natural resources, or primary or secondary industry, I would think in the course of the next few years the values will go up. If I were asked whether it is wise to buy common stocks I would unquestionably say yes, because every time I read the newspapers it seems to me I am reading very frequently about the increase in wages, and I worry that I might live too long, and all the money I have tried to save over these past 60 years of hard labour will not be worth very much. I think this is something a good many people in the community don't realize. Of course, one way of hedging against inflation and to maintain to some reasonable degree the value of the dollar is to buy equities, because as prices are inflated it is certain the equities will go up to some degree.

Now, since I am not too well qualified to speak on what is going to happen on the market and on what stocks to buy, I thought I would like to talk to you about the Toronto Stock Exchange. I am delighted to see a good representation of the Press here today. The Press in Toronto have always served the community well. Of course, some of us who are close to the scene of action have had some criticism levelled at us, but I know we got good, fair treatment.

I am reminded a little bit about the story of Lord Percy who went to visit the mental hospital. The superintendent who was showing him around said to him, "One of the patients here thinks he is God, the next man is the chap I was telling you about who thinks he is God." When they met, Lord Percy said to the patient, "There is something I always wondered about, how was the world created, was it done in seven days or did it take millions of years, how was it accomplished." The patient put his hand on his shoulder and said, "My dear Lord Percy we have such little time together, let's not talk shop."

In spite of that I am going to talk shop, and some of the things I am going to say are old hat. There are 113 seats on the Toronto Stock Exchange, and each of the seat holders is entitled to have five traders on the floor of the Stock Exchange. In other words, there would be if you had a full complement of traders, 565 traders on the floor. Obviously there are not that many at any time, there are usually between 300 and 400 depending on the volume of business to be done. Incidentally the title of my address, I deliberately put it down because I thought the Chairman wore false teeth and he would have a problem. I notice he didn't try to announce it.

The Toronto Stock Exchange is a non-profit organization, believe it or not, and each year at the end of the year if we find we are in the red too much we assess the members for enough money to pay the bills. Every transaction on the Stock Exchange has a little ticket as you know, and for each ticket the Stock Exchange charges 12 1/2 cents, so that a broker if he does a great volume of business it will cost him more than the broker with less business. This is the largest source of revenue for the Stock Exchange. The second source is from the companies that list their shares on the Exchange. When a company lists its shares it is charged a fee depending on the capital of the company. A company with a very high capitalization can pay as much as $15,000.00, which is the highest, and a smaller company can pay as low as $2,000.00. Once that fee is paid there is no other charge except a small sustaining charge of $100.00 a year charged to the companies. This is the second source. The third source is through the members themselves. When we find at the end of the year how much is needed to balance the cost of operating the Exchange.

Another important point which is of public interest, is that the Stock Exchange has very rigid requirements with regard to capital as far as its members are concerned. Every member of the Stock Exchange must have what we call net free capital, and the amount is based on the amount of business he does. When his business goes up he has to increase it, and when it goes down its the reverse. This net free capital must be exclusive of the value of the Seat, and the value of the Seat is quite large. In the last three years some seats sold for $ 65,000.00 and as high as $105,000.00 recently.

Now, we have a staff at the Exchange of Chartered Accountants known as examiners, whose task it is to check the members financial status, and if they find a member has been under-capitalized and has not reported it to the Exchange then that member is liable to a charge of a breach of our bylaws and can be brought before the Governors for disciplining.

Another interesting item is that the companies listed on the Toronto Stock Exchange numbers just over 1200. It is a very interesting thing to note that the number increases yearly, slightly, but only slightly, because it is quite amusing to look back and see the number of companies that have been taken off the Exchange because they have failed to meet our list of requirements or because of mergers or some other reason. Usually the number is just over 1200. There are two kinds of companies, two really separate categories. There is the industrial company and the speculative mining and oil company. The Toronto Stock Exchange is more or less criticized by business people who feel that by having these speculative stocks listed on the Exchange it damages the prestige of the Exchange. I feel it does in some quarters unless it is explained to people that the speculative stocks are subject to separate and special controls, and that in fact, by the Toronto Stock Exchange accepting this type of speculative listing the Stock Exchange has done the country a tremendous service because it has made the facilities of the Exchange available to the young mining and oil companies which are in a speculative state. A good many of these companies we must admit never have and never will amount to anything because by the very nature of things, hunting for a mine or an oil well or an oil field is highly speculative, you can't tell what's down there, and a lot of money is spent on drilling and tools and then they find it is not sufficient to justify further development. So a lot of money is spent on mining exploration and a lot of companies are organized to do mining exploration which never in fact prove successful. I don't make any excuses for the fact to the members of the Stock Exchange. When I am talking to groups of investment people I tell them quite clearly if they can't afford to lose their money they shouldn't buy those stocks, notwithstanding the fact its listed on the Stock Exchange. Very often we are asked what controls we have over the listed companies. The truth of the matter is we haven't very much control.

We have often been asked why don't you insist all your listed companies issue quarterly reports as is done in the United States, and why don't you insist that they issue better financial statements and so on and so on. Well, we do go about as far as I think we can go in urging companies to make better disclosures and to issue more frequent statements, and in the final analysis the only penalty we can impose is to suspend or delist its shares. When we do that we may be giving the company a black eye and cause him to be very annoyed. But the people that are really hurt are the shareholders, and it is therefore only under very pressing circumstances that we feel justified in suspending a company because of a failure to disclose information or because of misleading information. We have recently introduced a new policy for suspending speculative companies when they don't maintain a certain financial standard and don't accomplish or do as much work as we feel they should be doing. Here again while we are perhaps going very slowly we are going very surely, and some twenty of those companies have been suspended from trading during the past nine months. It seems to me you have to have a thick hide, like a rhinoceros, because you are damned if you do and damned if you don't. We think we have a good policy, we only do it after most careful consideration. As I say many people feel we should go further, and a good many people feel we are going too far. We get more letters from shareholders who have bought these cheap speculative stocks when we suspend a company than we do from any other people.

You might say what are the conditions for a company listing its shares on the Stock Exchange. One of the conditions is that the shareholders of the company have what we call liquidity. If you hold shares in a company you can call your broker and say, sell so and so. Its most unusual if you can't find a buyer on the Toronto Stock Exchange or some similar Exchange. If you want to buy, it would be most unusual if you can't have your order executed. With companies that are not listed on the Stock Exchange it's not so easy. If you want to sell it's not always easy to find a buyer. If it's easy to find a buyer you will find there is a greater spread between the bid and asked price than it is on a listed stock. Another good reason for listing shares on the Stock Exchange is the fact that information about the company and about the trading of shares and the number of shares can be obtained. Brokers who are members of the Stock Exchange all through Canada can obtain information on the trading of shares, and a listed company gets a great deal of publicity, and this is all to the good. It is interesting to note that on our dial quotation system which is now continent wide stockbrokers on the West Coast and in New York can dial a code number through a telephone dial in another office, and by dialing the code number of the listed stock on the Stock Exchange they can get the last bid and asked price, the total sales up to that time, and the closing price the day before. In another two weeks they will be able to get the dividend rate and the price earnings ratio. All this information is put into the computer at the Toronto Stock Exchange which we have installed at a cost of almost a million dollars, and of course, with the marvellous things the computer can do, the stockbroker can obtain this information if he has a customer that wants the latest information on a certain stock. Whether he is in Edmonton or Halifax, it's printed up immediately within a second or two.

You will be interested to know 100,000 queries are put into the quotation system a day and in the neighbourhood of 500,000 each week. Now just a word or two about the points people ask about and are interested in. I want to deal with some of the criticisms that are levelled at the Stock Exchange. Some of them are quite definitely justified and some of them not too well justified and made by people who are not familiar with the problems of the Exchange and the reasons that lie behind some of the things we do. I am reminded of the story of the man who joined a religious order. I seem to be turning to the religious side, I suppose it's my association with the Stock Exchange. This man joined a religious order, and one of the restrictions was you could only speak two words every ten years. At the end of the first ten years the Abbott called him in and said, "Well, what do you want to say? Remember you can only say two words." So the Monk said, "Lumpy beds." He went away and ten years later he came back, and the Abbott said, "Well, another ten years have gone, what have you got to say?" The Monk said, "Lousy food." Another ten years went by and the Abbott called him in and said, "What have you got to say?" And the Monk said, "I quit." And the Abbott said, "I'm not surprised, we have had nothing but complaints from you for the last thirty years."

One of the complaints levelled at the Stock Exchange is that we operate as a closed corporation or club. In a sense that is true because I mentioned about the seats. If any of you want to buy a seat--at the moment they are not available--they become available only when somebedy dies or retires. If you want to buy a seat you can buy it but you wouldn't be able to use the privileges that are attached to the seat, such as having five traders on the floor unless you were elected a member of the Stock Exchange, and where you get to be elected is by a ballot of the Exchange members, and if more than 20% of the ballots cast are opposed to your appointment you are not elected. Unfortunately, you wouldn't be a member of the Stock Exchange but you still have your seat. You might sell it at a profit, not that I want to push the sale of seats. There are people who have bought seats with the intention of holding them and then selling them. Since I have been at the Stock Exchange I have never known a case where a person who has bought a seat has been rejected by a ballot. Before a member buys a seat their wives are sensible enough to make a few inquiries to find out whether they are acceptable or not, but since I have been there everybody who has put their name up has been elected. For a long time after I came to the Stock Exchange I heard criticisms we never elected a Jew to the Stock Exchange. I know for a fact when applicants come up for nomination and a vote there is no question about their nationality, no question about their race, religion or colour, but they must be British subjects. I know for a fact there has been at least one person of Jewish faith elected.

I want to explain while there are only 113 seats, as soon as one member is elected they form a company with the approval of the Board of Governors, and may take in a large number of partners or directors in the company. Again, the partners and directors must be approved by the Board of Governors. Only the seat holder must be elected but these other associates are approved by the Board of Governors. Now, this means in fact, although there may be only 113 seats, and some people think we are a small closed corporation, there are in fact just under a thousand partners, principals and directors. The person who originally bought the seat may gradually take in more partners and divest himself of the interest in that seat. This is actually the situation. There are advantages in having certain characteristics of a club in this Stock Exchange. Incidentally, it's not only the Toronto Stock Exchange but the other Stock Exchange in Montreal and New York that have run into the same difficulties. Because this is a very highly skilled and prestigious business each member must have absolute confidence in his fellow member, because as you know on the floor of the Stock Exchange transactions are made involving tens of thousands of dollars simply by the scratch of a pen on a sheet of paper. A person that sells 1000 shares for a client wants to be very sure that the broker will stand behind this transaction and is going to pay the price that is marked on the slip of paper, so it is essential the seller will get his money and the buyer will get his shares. There must be this confidence between the principals. Sometimes a partner or a director or an applicant of a partner or directorship may be turned down, not because he has committed some legal offence and has some criminal record but because there is something in his past association or past record of business which indicates to the Governors of the Stock Exchange this is the type of person that is not suitable to be dealing this way on the Stock Exchange. It's a case of not only dealing with the Stock Exchange, it's a case of dealing with clients and the public.

Now, the person who is on the floor of the Exchange has an advantage over a person who is not there, but we have regulations that prevents a floor trader from taking a transaction away from a member of the public. We have had this regulation for quite some time. We have been criticized we haven't the machinery to see it was complied with, but now I am very happy to say we have the organization, the Stock Exchange has this function of seeing the floor trading facilities are carried on strictly in accordance with the regulations. To help in the surveillance of the regulations we have employed a full time Exchange officer, a man who spends his whole time on the floor, and an assistant who is there to police these operations.

Anybody who knows the stock market knows it's necessary if you are going to have a good market to have somebody standing ready to make offerings in order to get a good active market. This is done in all recognized Stock Exchanges and certainly it is an essential element in our Stock Exchange, just so long as a professional trader doesn't operate against the interest of the outside customer.

Now, we come to the question of primary distribution. This is one subject that one reads about in the paper. One gentleman who is quite intelligible with regard to the stock market said he wasn't quite clear what it was, and what all the criticism was about. I will try to tell you as simply as I can. Primary distribution is the sale of treasury shares directly from the treasury to the public. When a company comes to the Stock Exchange for a listing of 500,000 shares out to the public, these shares have been sold to the public out of the treasury of the company probably when it was formed, and the purchasers receive a prospectus, the prospectus having been filed with the Security Commission before the shares are sold to the public buyer of the shares. After having got a number of shareholders, three or four hundred at least, and say half their capitalization out in that way, they come to the Stock Exchange after some years of operation and say we want to list our shares. The Stock Exchange have a certain listing standard, and they look at the company, and if it meets with the Stock Exchange standard they list the shares, only the shares in the hands of the public. When the company wants to raise more money it will perhaps issue rights to the existing shareholders or if it doesn't it has to file a prospectus with the Security Commission, and those shares are sold not on the Stock Exchange but the same as the first shares were, and then they go on the Stock Exchange. That is all the industrial, mining and oils are under the Securities Act of Ontario. That is not something done by the Stock Exchange, it is authorized by the laws of Ontario and has been for many years. When a mining company comes to us for a listing, in that case we have also certain listing standards. First, the company must have $100,000.00 in the treasury, it must have a certain number of shareholders, 400 or 500, and it must produce engineers' reports and evidence that it has a reasonable expectation of developing a commercial ore body. Now, after scrutinizing this the Stock Exchange decides it is a company we will accept, all the shares of the company are listed, not only the 500,000 shares in the hands of the company but the entire capitalization. In a year's time when a company has again sold and spent the $100,000.00 it has in its treasury and it has indications it is going to have a commercial ore body and it needs more money, instead of doing what the industrial company has done, issuing a prospectus and selling those shares away from the Stock Exchange, under the law of Ontario that company can go to the Stock Exchange and say we have an underwriter who is prepared to buy 200,000 shares of our company at a dollar a share and he wants a part of another $100,000.00 at a $1.00, $1.50 a share. The Stock Exchange has a Committee, no brokers, but about a year ago this was changed. The members of the Stock Exchange used to sit on this Committee, but not now. The senior members of the Committee study the engineer's report and if they are not satisfied with the report they can say we have a consultant and we will have to get his opinion. After the most careful consideration they can say we have decided that we will accept notice of this underwriting but we don't approve it in so many words, we accept notice of the underwriting. When an underwriter pays the $200,000.00 to the company he gets 200,000 shares. These shares can be sold under the existing practice on the Stock Exchange through a broker, of course, acting for the underwriter, and the people that buy these shares don't get a prospectus. This I think is the principal criticism. Perhaps I shouldn't say the principal criticism, there is another criticism that has been justified, but I believe we have it licked pretty well now.

In the cheaper mining stocks it may be possible for the promoter to manipulate the market. Perhaps under the guise of stabilizing the market he will attempt to manipulate the market to his own advantage. This is something the Stock Exchange doesn't like, and it is something we are working on. We feel we have stopped up the holes that have permitted the manipulation of the market, but we certainly have not covered the point about the buyer of the shares getting a prospectus. The person doesn't know he is buying treasury shares. Perhaps it is wrong and we are now studying some way to see perhaps that the buyer will get a short form of prospectus, perhaps one in good plain print about who the directors are and what the company has accomplished and what the financial situation is should be enough. And perhaps too, the system should provide that the shares are not bought on the floor of the Stock Exchange during the operation of the market but are bought either before or after the market closes.

Now, Mr. Chairman, the time has come for me to close, although there is something more, more things I feel are of tremendous interest about the Stock Exchange but time does not permit me to cover them today. I would like to say this, the operation of the Stock Exchange are really quite enormous in my opinion. Yesterday there were 8870 transactions, individual transactions on the floor of the Stock Exchange involving 4,308,000 shares valued at $12,000,000.00. The average industrial price was $20.00 and the average mining and oil speculative shares was $1.10. This is much higher than it was three years ago. In the first three days of this week there was about $40,000,000.00 of trading on the floor of the Stock Exchange. In 1965 the volume of trade was 361 billion dollars. People say they don't understand, but if you give your wife a million dollars to spend at a thousand dollars a day, she will be back in just under two years for a little more pin money. If you give her a billion dollars she won't be back for three thousand years, which is a pretty good way to explain the difference between a million and a billion dollars.

You probably noted in the newspapers that the bill now before the Ontario Legislature which will deal with Stock Exchange trading also provides that the Ontario Securities Commission may when it is in the public interest intervene in trading on the Stock Exchange or with respect to securities listed on the Stock Exchange.

In Conclusion, Mr. Chairman and gentlemen, it seems proper and even necessary we should remind ourselves the Toronto Stock Exchange while it may have had weaknesses and imperfections in its policies in the past, nevertheless the Exchange should be recognized as an efficient, honestly operated, and adequately controlled financial institution. It has made and continues to make an inestimable contribution to the economic life of Canada, and that is so recognized I might say throughout the business world.

In a few weeks I will be leaving the Exchange, and leaving it with regret. During my five and a half years of office I have had the greatest possible support from the Governors and the members of the Exchange, and I have been impressed by their desire to improve their services to the public, sometimes at very considerable financial loss to themselves. I am indeed proud to have been associated with them.

Thanks of this meeting were expressed by Col. Bruce J. Legge.