'Ugly few months' ahead for TSE - antiquated trading system

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Thursday March 09, 2000 'Ugly few months' ahead for TSE

Exchange's antiquated trading system could damage reputation, experts warn

Philip DeMont The Ottawa Citizen

TORONTO -- Expect a tough spring and summer on Canada's largest stock market as the Toronto Stock Exchange tries to use outdated technology to cope with ever-increasing trading volumes, investment experts say.

"It's going to be an ugly few months," said Paul Bates, president and chief executive of investment house Charles Schwab Canada.

And some industry players are afraid the near-term woes could develop into a longer-term headache if the computer glitches damage the TSE's reputation.

On Tuesday, the exchange lost 2 1/2 hours of trading time after its computerized order system failed twice during the day.

The exchange is using an electronic trading system that is more than 20 years old and is due for replacement later this year.

In February, the TSE was hit by two smaller computer foul-ups on the same system, which is not expected to be replaced until at least September.

Most executives blame the higher trading volumes for the TSE's recent problems.

For instance, in 1992, the average investor did 10 to 12 transactions annually, Mr. Bates said.

Now that average has increased fivefold to about 50 buys and sells in a year, he said.

While many investment executives and observers praise the TSE's sterling reputation, they also point out that the more problems the exchange endures in completing orders, the greater the potential damage to its long-term effectiveness.

"This constitutes a black eye for the TSE," said Gordon Roberts, a professor of financial service at York University's Schulich School of Business. "And there are going to be effects beyond (short- term trading woes)."

In recent years, the TSE has been looking for ways to attract new technology companies to the exchange. Currently, many of these firms list their stocks on the Nasdaq, which gets the attention of U.S. high-tech investors.

Technical problems of Tuesday's variety hurt the TSE's reputation as a new-economy exchange, especially among technology companies deciding whether to list in Toronto as well as Nasdaq.

"If trading stoppages become a persistent problem, that concern will become serious," said Ted Anderson, a partner in the Toronto office of Ventures West Management Inc., a Vancouver venture capital fund that helps new firms go public.

"It's all about credibility. How people trade does not matter (to these companies), but, if these problems persist, it is going to affect new listings."

Investment brokers are unlikely to be overly forgiving if the TSE keeps hitting technological walls throughout the summer.

"Six months is an eternity in this market," said Brendan Caldwell, president of Caldwell Securities Ltd. of Toronto. "Eventually, you have to look for (trading) alternatives."

Investment dealers have a growing number of ways of making stock trades besides the traditional route through the TSE, industry executives noted.

For example, Versus Technologies Inc., which runs a discount brokerage, also has its own block-trade exchange service where institutional investors can locate buyers outside the TSE system for their large share holdings.

"It provides an alternative for clients," said Versus vice-president Deborah Thompson.

So far, the system matches buyers and sellers in five to eight per cent of the orders, a decent success rate, she said.

While Ms. Thompson refused to say that her company benefited from the TSE's technology woes, she said Versus wants to expand its alternative market operations. "We have the technical acumen to do this. We have the capacity. And we have the desire."

Investors fed up with the TSE's continuing problems might take a serious look at Versus-type systems or after-hours trading operations provided by many major financial institutions.

"If Toronto goes down enough, it becomes a pain," said one mutual fund manager. "Then there is a danger that making your trades through other exchanges or in other networks becomes the default. And, once you have switched, how much will it take you to switch back to the TSE?"

But Mr. Bates said such comments, overstate the potential effects. Other stock exchanges also are suffering under the effects of skyrocketing trading volumes, he said.

For example, Schwab's traders must wait about 90 minutes to buy and sell stocks on Nasdaq's over-the-counter markets, he said.


-- - (x@xxx.com), March 09, 2000

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