Could a Little Competition Hurt Anyone?

Canada’s stock markets are going through yet another consolidation phase. Market Regulation Services Inc. (RS) and the Investment Dealers Association of Canada (IDA) are planning a merger. When I worked for Canada’s leading industry educator, liaising with both institutions was essential to my job. But, with so much regulatory overlap, that also made my job quite difficult. I’m sure the industry is thinking one watchdog is better than two, regardless of how many heads it might have.

Lately, however, it seems the RS-IDA merger might be on a collision course with a brick wall. It could be because Canada’s six major banks and Canaccord Capital Inc. want to start up another stock exchange next year, aptly called “Alpha.” This consortium currently controls about 65% of all trading in Canada. For the first time in its history, the Toronto Stock Exchange (TSX) is having a real competition on its hands.

Sure, before Canada’s stock exchanges consolidated in 2000 almost every province had an exchange. But these marketplaces were a far cry from competition to the major player on Bay Street. As part of the restructuring, all senior listings moved to the TSX, juniors joined the TSX Venture Exchange, and derivatives settled happily on the Montreal Exchange. Life was good for quite a few years. Then the TSX demutualized, becoming a public company, and its regulatory subsidiary became an independent entity.

Usually, I don’t complain about having more competition. It is good for the microeconomic wheels, moving and offering consumers better prices and more choices. But I’m not so sure that having a marketplace run by brokerage houses and powered by huge bank treasuries is going to be good for investors.

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You see, securities regulation in North America is self-governed. The RS-IDA merged regulator is, therefore, supposed to be independent from entities it is supposed to regulate. Otherwise, the entire concept becomes moot. As part of the merger, the TSX agreed to give up its control over the newly merged regulator.

The same, however, is not to be expected from the banks and Canaccord behind Alpha. This is why the TSX is now rethinking the idea of giving up the control over RS, although any further delays could really aggravate the Ontario Securities Commission (not a smart thing to do).

That’s how a power play is developing among Bay Street movers and shakers. But what’s in it for investors? Well, more senior marketplaces are not going to change how securities are priced or how well (or not) they might be performing. However, what will quite likely be impacted are trade clearing services, commission fees, and who knows what other fees might come into play once banks get their hands on stock market regulation. We all know how much banks love their fees, don’t we?