The economic boom ushered in by the industrial revolution of the late 19th century sped the modernization of North American cities, and the laying of railroads connecting major centers of commerce in the U.S. and Canada.
At the dawn of the 21st century, technological advances and a surge in stock-market investing among U.S. residents have opened the Canadian markets as never before, propelled not by rail links, but an electronic pipeline, transporting an increasing volume of business.
A network of order-routing and execution systems is carrying Wall Street stock orders for execution on Canada's exchanges.
For Canadian dealers, tapping accessible U.S. equity order flow has become a popular trading strategy, helping broker dealers to reap record profits in recent years.
"Cross-border trading [with the U.S.] is increasingly important," said Paul Bowes, vice president of equity markets at the Toronto Stock Exchange (TSE), Canada's largest exchange. "We [Canadian stock markets] are just beginning to tap our potential."
Surge in Trading
According to the Securities Industry Association, U.S. investors made U.S. $20.42 billion in gross transactions in Canadian equities in the third quarter of 1997, up 9.5 percent from the previous quarter.
Only U.S. equity activity in the U.K. and Japan exceeded the third-quarter gross transactions or purchases plus sales of Canadian stocks.
The New York-based trade group noted U.S.-investor acquisitions of foreign securities in the third quarter of 1997 totaled nearly U.S. $38.6 billion, representing almost half of the U.S. $77.5 billion acquired through the first three quarters of the year. These acquisitions helped push U.S. holdings of foreign stocks and bonds to a record U.S. $1.5 trillion.
"The U.S. interest in Canadian stocks is probably consistent with prevailing implications of global investing by Americans," said Andrew Karolyi, a professor at the Richard Ivey School of Business at the University of Western Ontario. He added that the widespread diversification of global trading has risen with the demand among investors to diversify their portfolios.
With global investing on the rise, Canadian firms are benefiting greatly. The Investment Dealers Association of Canada estimates brokerage revenues accounted for one-half of the financial-industry's revenue in 1997. The Toronto-based trade group reported that brokerage revenues partly through the surge in U.S. business have expanded at an average rate of 18 percent annually since 1993.
"We are dealing with a large number of American firms following the global trend of international investing," said Paul Chalmers, director of international trading at Vancouver-based Canaccord Capital.
Indeed, more than half of Canaccord's 35 equity traders in Vancouver work with U.S. retail and institutional order flow, according to Chalmers. "The population of the U.S., about 270 million people, is almost ten times that of Canada," he added. "Americans are twice as likely to buy stocks as Canadians. Americans are spreading their investments across all markets, and we are benefiting." Chalmers estimates his firm works with 500 broker dealers in the U.S. each year.
In fact, according to Lawrence Booth, a professor of finance at the University of Toronto's Rotman School of Business, a large number of Canadian stocks have as much U.S. ownership as Canadian.
"Americans buying Canadian stocks has become a normal course of business," Booth said. He added that with natural-resource stocks floundering recently, U.S. investors have been surging into the Canadian banking and financial-services industries. "I wouldn't be surprised to hear news of a major Canadian bank merger with all of the activity," Booth said.
"Americans are definitely more interested than ever before in buying in Canada," said Mary Ann Camilleri-Power, international equity trader at Toronto-based Nesbitt Burns. "Our dollar has dropped, so the price of Canadian stock is more attractive."
The Canadian dollar has plummeted so severely, on Jan. 21 it reached its lowest level against the U.S. dollar since 1858 the year it replaced pounds, shillings and pence as a unit of exchange. On Jan. 21, the U.S. dollar was at Canadian $1.45. Financial experts blame the drop on low interest rates in Canada and the recent slide in the price of commodities that are an important part of the Canadian economy.
Consequently, with the U.S. dollar stronger in Canada, Canadian stocks are a more attractive investment for American investors.
At Nesbitt, Camilleri-Power and five other traders in Toronto deal exclusively with U.S. firms. The institutional house also has three international traders in New York.
At Yorkton Securities in Vancouver, international trader Ken Coe estimates 50 percent of order flow across Canadian exchanges comes from the U.S. "I think the advent of new technology will continue to feed this Canadian boom among firms," he said.
Traditionally, business from U.S. dealers was conducted over the telephone. Even today, most dealer-to-dealer interaction is done over the telephone. But several electronic systems are speeding the flow of orders and creating a seamless trading pipeline.
"Electronic systems will create faster, quicker, more efficient vehicles to access liquidity," Karolyi said. "It is the surge in American business that has helped speed their arrival."
Camillieri-Power concurred. "We are trying to improve our systems for a seamless electronic network," she said. "That is clearly the way business is going. We have to make these improvements to keep our clients American and Canadian happy."
Cross-Border Trading
A Canadian dealer, like Chalmers at Canaccord, quotes a market in a stock. U.S. dealers see the quote on their own market-data systems. They call Chalmers to send him their order, and his desk calculates the exchange rate, charges a commission and sends the order to the exchange system for execution. Chalmers then writes and posts the trade in net U.S. funds for the U.S. dealer.
Coe at Yorkton explained that when a U.S. dealer does not have access to his or another Canadian-trader's quote, the initial telephone call from the U.S. is to check his quote. The American dealer will then check Coe's quote with one or two other dealers before routing his order to Coe's desk.
But more orders are being routed electronically. For example, on a VERSUS system, operated by the Toronto-based developer, distributor and licensor of electronic trading systems, VERSUS Technologies, trades are routed directly from a U.S. dealer to the designated exchange or crossed with a participating broker. Orders routed electronically are sent to a Canadian-dealer's desk from an American desk.
Trades executed in Canada are normally cleared in Canada, and Canadian dealers are subject to their national regulatory agencies. On the other end, the U.S. firms are subject to regulation by the Securities and Exchange Commission and the National Association of Securities Dealers.
Canadian Exchanges
All major Canadian exchanges have switched from open-outcry floor environments to electronic trading. Floor brokers have moved to their firm's offices, with trading done from far-reaching and remote locations over computer networks. Each exchange has created its own terminal-based system for trades to be crossed in the electronic pit or filled by the specialist.
Among Canadian exchanges, the TSE accounts for more than 84 percent of the country's trading activity. The 11th most active stock exchange in the world, the TSE set its fifth consecutive yearly value record in 1997 at Canadian $423 billion. Currently, the TSE quoted market value stands at Canadian $1.27 trillion.
Owned by its 101-member brokerage firms, the TSE is currently implementing TOREX, a new trading complex. The TOREX system will offer traders a workstation or trading application to process, monitor, record and execute trades of the TSE's 1,720 listed stocks.
"TOREX will be quite a leap for some of our traders," Bowes said, "but I know it will help our investors in the long run."
The Canadian Dealing Network, a subsidiary of the TSE, is Canada's only organized over-the-counter market. The competitive dealer market similar to Nasdaq traded 2.8 billion shares in 1996, up 70 percent from 1995.
The Montreal Stock Exchange (MSE) is Canada's second major exchange. In 1997, the total MSE trading value reached Canadian $61.91 billion, surpassing the previous record set in 1996 by 23 percent. The MSE saw 1.93 billion transactions last year for its 852 issues. The Boston Link, an agreement with the Boston Stock Exchange, allows the electronic exchange to route retail orders to Boston for automatic execution. The agreement allowed Montreal and Boston dealers to jointly trade 34.3 million shares in 1997.
On the Pacific coast, the Vancouver Stock Exchange (VSE) is a growing market for small-cap and volatile young companies looking for exposure, according to Camilleri-Power. "It's a shooter's market, attracting investors looking for a big gain," she said.
In 1997, a total of Canadian $1.47 billion was raised through the VSE. The electronic venture-capital market specializes in resource-based companies, although technology, commercial and industrial companies have grown in listings in recent years as the exchange has grown. In fact, the VSE welcomed 54 new listings in 1997, the most in seven years.
American Outposts
A number of Canadian firms have opened outposts in the U.S., and are becoming members of American exchanges.
"I think that with globalization and increased regulation, more and more firms are becoming members of foreign exchanges," said Richard R. Angle, head of international trading at Vancouver-based Georgia Pacific Securities. "Sometimes you can get a crappy deal unless you are a member of the foreign exchange you are dealing with."
Camilleri-Power explained her firm has opened an office in New York with three international equity traders, and is now a Nasdaq and New York Stock Exchange member.
Toronto Dominion Bank, the large dealer subsidiary of The Toronto-Dominion Bank, jumped into international trading two years ago with the surge in northbound order flow. They have nearly 25 equity traders in New York, with five focusing on orders originating in Canada for execution on American exchanges. Ray Tucker, vice president and director of the firm, estimates ten percent of TD's international trading is orders sent from Canada to American exchanges.
Trading South
For international traders in Canada dealing with the U.S., the majority of orders are sent from the U.S. for execution on Canadian exchanges. To be sure, some Canadian firms do send orders south for execution in America, and many combine north and southbound business.
Large firms with offices in the U.S. normally send orders from their Canadian desks to their American desks for cheaper executions. Other firms make deals with U.S. firms that send order flow north, Coe said. He added that 30 percent of Yorkton's international trading activity is orders sent to the U.S.
"The trading is no different than that done by U.S. firms sending us orders," Coe added. "But there are just more willing investors and more capital in the U.S."
"Americans," Chalmers added, "are just more likely to buy stock,".
These Canadian dealers remain confident Americans will continue to explore the Canadian markets.
"We think that Canada [Canadian stock] is a wonderful opportunity for U.S. firms," Bowes said. "With our technological innovations, we hope they find it easier to take a second look."
