Getting the Barriers Between Canada and U.S. Equity Markets Down

A few years back, I remember how fragmented regulation of Canada’s securities markets was (and unfortunately, still is). Every province has its own securities commission. Then there is the Investment Dealers Association, Market Regulation Services, Mutual Funds Dealers Association; as well as the regulatory bodies for insurers, banks, and so on.

But look at us now — on the verge of breaking down the barriers between the U.S. and Canada. Big kahunas at the Securities Exchange Commission and the Toronto Stock Exchange have been expressing their support for a free-trade model for years.

Basically, everyone is rooting for Canadian companies to freely operate on U.S. exchanges, under U.S. rules, and for U.S. companies who are freely operating on Canadian exchanges under Canadian rules. It seems the world is growing smaller and smaller, and it really could take a whole village to list a company in a foreign jurisdiction.

Who stands to profit the most if and when trade barriers come down between the U.S. and Canada? Well, that would be Canada, mostly due to finally being able to lower costs of trading and enjoy less-complicated and more-efficient cross-border trading.


As already mentioned, supporters of the idea have been working on it for years. Lately, things have sped up, especially with the new derivatives market joint venture, the International Securities Exchange, set to make its entrance in two years’ time.

If barriers between the U.S. and Canada’s securities markets were to fall down, the TSX would stand to profit for a number of reasons. For example, since TSX Group Incorporated went public five years ago, it has maintained an incredible growth rate of 34% on an annual basis.

Yet, when compared to other global exchanges, the TSX has had a disappointing price-to-earnings ratio to say the least, while the company’s share price has been left in the dust behind its counterparts worldwide. This is why diversifying into other markets could dramatically improve the exchange’s value.

One of the problems with the TSX is the size of an average trade, which has dropped below 500 shares. This is partly due to the exchange being completely electronic and capable of chopping up orders into bits and pieces. And as orders get dissected, dealer commissions go up, pressuring traders to raise their fees as well.

Paradoxically, block trades (which are large, institutional orders) are increasing. As block trading increases, so does the risk of front- running, and so do the efforts to accommodate such orders while keeping them within regulatory bounds, which puts more pressure on improving technological platforms. Again, such improvements come at a hefty price — a price that is mostly passed on to investors.

By all accounts, easing cross-border trading could help remedy these faults, increase liquidity, and ultimately lower trading fees — all of which is bound to make Canadian investors very happy.