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© Copyright 2000 Rogers Media. The following article first appeared in the December 2000 edition of
BENEFITS CANADA magazine.
Breakdown on the TSE
With a rash of trading failures, institutional investors are bypassing the Toronto Stock Exchange.
Will other exchanges become the preferred route to market?
By Barbara Clapham
Plagued by problems, the breakdown of the Toronto Stock Exchange's (TSE) trading system on Oct. 25 was the
worst failure yet. Chaos prevailed as many investors were left in the lurch about whether their orders had
gone through before trading in the shares of Nortel Networks was halted. Who is to blame for this latest
fiasco?
Most observers don't point fingers, they just want the problem fixed--whatever it takes. But the response
from Dale Richmond, chief executive officer of Ontario Municipal Employee Retirement Savings Plan in
Toronto, typifies the view of plan sponsors who think the TSE's breakdowns are of great concern. "If it was
just once we could understand it. If it is the second and third and fourth and fifth time something still
isn't operating properly, it is time to make the corrections so that those things don't occur again," he
says.
Most institutional investors simply routed their trades to the New York Stock Exchange, where Nortel is
also listed, or traded between themselves. More and more trading is being done off the TSE. Over two-thirds
of the companies listed on this exchange also trade on an American exchange, which provides them an
alternative venue for transactions.
This presents a problem, however. The more trading that is done off the TSE, the less liquid the exchange
will be. And an exchange which lacks liquidity simply will not thrive in the long run.
Given how easy it is to bypass, just how important is the TSE to Canadian institutional investors?
Very important, according to Paul Bates, president and chief executive officer of Charles Schwab Canada.
Bates believes institutions want to trade on the TSE and want this exchange to be an efficient and highly
liquid market. Problems such as those that occurred in October are not the sole responsibility of the TSE,
he adds.
Many member firms of the TSE have not updated their systems to enable the modernization of the exchange's
trading system, says Bates. "We've got the highway built, but the on-ramps aren't finished," he explains.
Richmond admits he does not know enough about the inner workings of the exchange and the member firms to be
able to cast blame, but thinks a stock exchange should be able to fulfill its basic function of completing
transactions. "Whatever it takes behind the scenes to make sure that [the TSE] functions properly, one
presumes that attention is paid to that," says Richmond.
So is the TSE fixing what ails its operations?
"[We] can't fix the situation completely because we are still using a really old trading engine. But in the
short term [we] can make the adjustments to help increase the capacity," says Brenda Edwards, media
specialist at the TSE. "In the long term, in 2001, we are scheduled to put in a new trading engine, but
before we can do that all of the member firms have to get onto the new gateway. Once that's complete, then
we can put in the new engine."
Some progress is being made. The old Computer Assisted Trading Network, the system which caused most of the
recent problems, was disconnected in early November. The new engine is expected to be up and running in the
second quarter of next year.
Meanwhile, those who trade through the TSE may be wise to have a contingency plan. As Richmond says, "the
first time the exchange goes down, shame on them; the second time it is shame on us if we can't get around
it."
If those on-ramps aren't built quickly, investors may permanently adopt a new route to access the markets.
Barb Clapham is editor of Canadian Investment Review and a contributing editor to BENEFITS CANADA.
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