Wednesday, February 9, 2011

TSX + LSE = bff (best friends forever... or maybe not)

Have you ever been to the Guelph Farmer's Market? It's a really great place to buy food and supplies, and it's wonderful to meet the people who work so hard to put food on the table. A lot of farmers come together to sell eggs, cheese, bread, fruits, vegetables, milk, meat, basically everything you need to fulfill your caloric and nutritional requirements. Now, let's pretend the Guelph Farmer's Market specializes in fruits and vegetables; they'll still sell everything else, but now they have a focus on things that grow in the ground.

There is also a similar farmer's market in Waterloo, which is a bit bigger and specializes in meat products (think free range hens, organic sausage, etc, etc).
So, these two markets are functioning just fine in their respective towns. They open up on Saturday, sell for a few hours, and then close up for the week. If you live in Waterloo and want something from the Guelph Market, you have to go through the hassle of driving to Guelph (or ride your bicycle), and let's pretend the Guelph Market charges a "fee" for out-of-towners to buy from their market (adding to the hassle).

I'm sorry if this is really confusing so far; I'm building toward something here...

Now, let's pretend the two markets built a high-speed subway between them, and removed the "out-of-towner's fee". You could shop at both markets at the same time, with little hassle and with ease.

Now, to convert my analogy to real life...

The Guelph Farmer's Market represents the Toronto Stock Exchange (TSX), but instead of specializing in fruits and veggies, they specialize in resource stocks (mining, lumber, energy, etc). The Waterloo Farmer's Market is like the London Stock Exchange (LSE), who specialize in commodities (things we buy).
The Toronto Stock Exchange and the London Stock Exchange might merge. These are two separate markets, where companies sell shares in their companies to buyers. Each marketplace is owned and operated by a company, who regulate the transactions. Sort of like the security guards at the farmers market who ensure no one gets ripped off, and the landlord who rents the building to farm vendors. The company that controls the Toronto Stock Exchange (TMX Group) and the company that controls the London Stock Exchange (LSEG) might merge into one HUGE Trans-Atlantic market. If the TSX and LSE merge, it would be the single largest resource trading market in the world, and the 8th largest stock market (like a farmer's market selling 6 trillion dollars worth of stuff).

How does my analogy of the "out-of-towner's fee"and the high-speed subway work? Here's how:
-Joining the TSX and LSE makes new products more easily available to prospective buyers on each side of the pond. LSE investors would have easier access and more accessibility to Canada's resource stocks, and vice-versa, TSX investors would have easier access to the LSE's companies.
-From a corporate perspective, it will become easier for companies to generate investment (supposedly), from a large pool of investors.
-It will raise the profile of companies on the TSX, mainly the small to medium sized companies who currently don't have a large profile in Europe and Asia.
-By creating a single market with uniform rules, the efficiency of trading increases.
-The time zone of the LSE is better matched with that of the Asian markets.
-The LSE would increase the amount European and Middle Eastern capitol available to TSX investors/companies.

Despite the positives, there are several political issues to consider...
-The Conservative's industry minister, Tony Clement, has not taken a stance yet. Instead, he will consider a financial review (any transaction over 299 million is subject to government approval). Remember when the government blocked the take over of Potash Corp by BHP Billiton in October last year? Free market Capitalism vs. protecting national interests.
-In 2008, the Montreal Stock Exchange (MSE) merged with the TSX. Maybe I'm just so out of the loop, but I don't hear much about Montreal's derivative based stock exchange, just two years after the merger. It definitely became overshadowed by the TSX. How will the role of the Montreal Stock Exchange change after this merger with the LSE? The CEO of the MSE has argued the proposed merger will be beneficial for the MSE, but will it be beneficial for Canadians?
-The TSX is Canada's largest marketplace, do we really want this national institution subject to foreign control? Obviously, this is just another trend in the globalization game, but is it something we want?
-Will Canada lose sovereignty over its security firms? Probably, because it will be regulated in London, rather than the Ontario Securities Commission.
-The Provincial security regulators already say "NO" to a federal regulator, so why the heck would they allow a foreign regulator?
-Will transferring ownership of the TSX jeopardize the financial stability of the Canadian economy? Canada has emerged from the recession in far better shape than the UK, and most other G8 countries. Perhaps, it's best we continue to look out for ourselves...

Personally, I don't think the merger will go through; after all, the Conservatives blocked the sale of the CANADARM and the sale of Potash Corp. I apologize for my over simplification of the matter; below are some links that will help explain the issue:

A Perspective from London:

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