Making sense of the TMX-LSE merger

So, what is Canada giving up if we sell — sorry, "merge" — our stock markets with the London Stock Exchange?

I would say a lot of people, including people in the business, have no idea. But to many other Canadians, as I have discovered in the wake of this deal, the implications of the merger of the TMX Group, operator of the Toronto Stock Exchange and the Toronto Venture Exchange, and the LSE are even more confusing.       

Let's tackle the simple issues first. Stock markets involve people standing in a room shouting at each other, right? Wrong. With a few rare exceptions, stock exchanges are as virtual as a game of Star Craft II.      

It always surprises me how many otherwise well-informed people (including young TV producers trying to illustrate "stock exchange" in a news story) think differently.

Not only are stock markets now completely inside computers; they have gone through a second transition that is more important to this week's deal: stock exchanges have become themselves publicly traded companies. 

These two changes, virtualization and corporatization, have created a great gap in the way Canadians understand the takeover, whoops, "merger," of all our biggest stock exchanges in the multi-billion-dollar deal announced on Wednesday (which still needs government approval).     

There are two diametrically opposed ways of viewing exactly what markets and marketplaces are.

To most Canadians — those only distantly connected to the world of finance — a market is a physical place where we go to buy and sell physical things. For those people, markets are real, not virtual. They are local institutions owned by the community.  

The best parallel might be a weekly farmers market, where real people bring products they have grown or made and others come to buy them. A farmers market has a single location so people can find it. It is run by a group of local Canadians, which we might call the Farmers Representative Council. The council decides on a membership fee or charge to use the market stalls. The FRC also decides on opening hours and various rules like whether or not dogs are allowed in the market.

This is very much how financial exchanges used to run as well. And when the Toronto Stock Exchange began life in the mid-1800s this was the way it operated.  

But not any more.

Markets are money

The year 1997 was when the Toronto Stock Exchange went virtual. Only three years later, it transformed into a for-profit company. Nowadays, the TSX, like many other big stock markets, is no different from other publicly traded companies.

And this the basis for the other completely opposite way of looking at a marketplace the way the financial world views it. From this financially sophisticated perspective, it is as if the Farmers Representative Council had been sold to a group of unknown strangers. According to the calculus of public companies, it doesn't really matter who owns the market. The owners don't have to be local, and they don't have to be Canadians. The only thing that matters is that a single share is worth a price, and anyone who wants to offer a little more than the going rate can buy it. When it is time to make rules or decisions, every share gets a vote.

Location is also now out the window. From previous takeover deals, we've already found out it doesn't really matter where companies like Stelco or Inco or Potash keep their head offices. In the case of stock markets, it is even less important than in the case of businesses with factories and mines. With stock markets, virtual trades can be made from any computer almost anywhere. 

Other physical aspects of stock markets are gone, too. Stock certificates, for example, have become virtual, largely replaced by bits and bytes on computers.

So, now that we see the two ways of looking at Canada's markets, we come back to the real question: what difference does it make to Canadians who owns them? What we discover is that it depends which group you ask. If you ask many Canadians, they will say, "We don't want Toronto, Montreal and Calgary to lose their markets. We don't want foreigners to buy up and control our local institutions."

If, on the other hand, you ask financial specialists, their answer will be clear: "It is not up to Canadians to decide who owns our markets. It's up to the people who own the shares."

Here, we are seeing the exact same divide and the same difference of opinion that occurred over the sale of the Potash Corporation of Saskatchewan. As Canadians, we feel like we own the Toronto, Montreal and Calgary stock markets. But is that feeling virtual or real?

And we are seeing the same hard questions as in the Potash case: are corporations institutions, or are they private possessions?

In my opinion, it is clearly in the interest of Canadians to control and retain the head offices of important companies within Canada. As I said before in the case of Potash, keeping brick-and-mortar head offices at home creates spin-offs — from legal work to the sale of hot lunches — that make the Canadian economy strong.

In the case of the TMX-LSE merger, there are other reasons to be concerned. If provincial governments think a single Canadian regulator will shrink their influence and power, just wait until the really import decisions are being made by the London-based Financial Services Authority. Bleating from provincial capitals will sound like peeps to them.

But here is the hard part: we may want to keep the company, but it is not ours to keep. How do we decide when it is right and fair to treat someone else's private property as our own institution?

If only the government had made it clear exactly why it turned down the Potash purchase! Then, we could examine the criteria for demonstrating that the Potash sale was not a "net benefit" to Canada and see if they apply this time. But despite many requests from those of us paid to ask those questions, the government never answered.

It well may be that the real and unspoken reason the Potash deal failed was because it was politically unpopular. The Conservatives did not want to be seen as "the party that sold out Canada." If that is the case, the only answer is to ignore the experts and listen to ordinary Canadians.

So, if you are planning to make a noise, now is the time. London may not hear you.