Markets: Nothing ventured

The TSXV’s 23-point plan has three objectives: to reduce compliance costs for issuers; to grow listings and diversify away from the resources sector; and to boost market liquidity and attract more investors.

The plan has the support of the Investment Industry Association of Canada (IIAC), which believes that it will be “effective.” However, the IIAC also suggests that the plan “should have been launched much sooner.”

The audience at the TSXV’s town hall in Toronto on Jan. 20 was supportive of the exchange’s plans as well, but particularly stressed the lack of liquidity in the venture market as the primary problem and the scarcity of retail investors as the exchange’s central challenge.

Unlike the senior end of the market, which largely caters to institutional investors and professional traders, the more speculative, junior market is reliant upon small investors that are open to a hefty dose of investment risk. Yet, numerous obstacles to participation by retail investors in the venture market have arisen in recent years.

The abysmal market conditions and the horrendous performance of TSXV stocks have been enough to drive off some investors. At the same time, the struggles of the market’s issuers have created the perception that the exchange is full of barely solvent basket cases.

Running on fumes

Indeed, attendees at the Toronto town hall noted that many of the TSXV’s listings are companies that are “running on fumes” and can’t finance their projects and, therefore, can’t attract investors. The perception of the TSXV, one issuer noted, is that “it’s full of resources companies that are poorly capitalized.”

Although the TSXV still touts itself as the world’s leading public market for fledgling companies, the exchange is starting to acknowledge its image problem.

“We have a reputational issue – we recognize that,” admits Nick Thadaney, president and CEO of global equity capital markets with TMX Group Ltd., the parent of the TSXV.

Yet, when TMX polled the town hall’s audience electronically to assess whether to rebrand the exchange, only about 20% voted in favour of that as a solution.

To be sure, the TSXV’s problem isn’t purely its image. Some market participants also cite demographics as the reason for the lack of retail investors in the venture market these days. As the population ages, investors that may have been willing to take a flyer on junior stocks in the past are shifting toward more conservative investments as they approach retirement and look to take some risk off the table.

Meanwhile, the younger generations of investors are being raised on a diet of managed products rather than on individual securities – let alone junior stocks.

Still, other market players cite the ever-growing dominance of the bank-owned dealers as a reason for eroding retail participation. According to the IIAC, 34 investment dealers have vanished over the past three years, either through consolidation, closing up shop or shifting to the exempt market.

As these firms recede, their clients are left in the hands of the larger, integrated firms – particularly the big bank-owned dealers – and there’s a sense within the venture community that investment advisors at these firms increasingly are unable to put their clients into speculative stocks.

There are a couple of reasons underlying this opinion. For one, there’s the notion that the bigger firms prefer the revenue they can generate from packaged, managed products compared with the trading commissions produced by dealing in small-capitalization stocks. Moreover, there’s a belief that the compliance culture at the large firms is more risk-averse and unwilling to have clients exposed to speculative securities, particularly in the wake of the tougher suitability obligations that have been introduced as part of the client relationship model reforms.

Indeed, one of the TSXV’s goals is to get some better clarity from regulators on the suitability obligations and their impact on the ability of advisors to recommend speculative stocks.

Investor reluctance

In mid-December, the Investment Industry Regulatory Organization of Canada (IIROC) did provide further guidance on firms’ obligations to clients seeking to engage in speculative trading and also confirmed that the new emphasis on overall portfolio suitability still allows clients to hold individual, high-risk securities that may exceed their overall portfolio risk tolerance.

There’s some hope that this new guidance will help to ease retail investors’ reluctance to invest in TSXV-listed companies.

In addition, the TSXV is aiming to expand its investor base by drumming up business from American investors. TSXV president John McCoach told the town hall in Toronto that the most difficult and complicated initiative on the venture exchange’s agenda is reducing barriers to American investors.

“We’re going to do our PhD on this topic, and try to identify and reduce those barriers,” he told the meeting, adding that if the TSXV can dismantle some of the obstacles to attracting investors in the largest market in the world, that could have “a material impact” on venture market liquidity.

The TSXV also is taking measures to enhance investor participation by promoting the companies that are listed on the exchange more aggressively, enhancing investor literacy, developing analytic tools for investors and facilitating communication between issuers and investors.

Yet, some of these proposals raised concerns among members of the audience at the Toronto town hall. In particular, the conflict between the exchange’s role as a regulator and the TSXV’s business ambitions could become a bigger issue if the exchange ramps up its efforts dramatically to promote its listed companies, one issuer warned.

McCoach stresses that the exchange recognizes that not undermining investor confidence by compromising investor protection is critical and he pledged at the town hall in Toronto that the TSXV won’t do that.

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