Automation soon VSE improves its image

In today’s intensely competitive global economy automation has become synonymous with survival not only for industry but for stock markets as well. Determined to maintain its pre-eminence as North America’s leading venture capital market, the Vancouver Stock Exchange plans to have fully automated trading by February, 1988.

In recent years many other important changes have been implemented by the exchange’s thoroughly professional president, Donald Hudson. Indeed the image of the VSE in the public’s eye has improved dramatically; they are beginning to except the exchange for what it is — a high risk, speculative, venture capital market which is much more carefully regulated than most people recognize.

The infamous Oct 19 trading debacle is now over two years behind them and two promoters charged with fraud in that incident have been sentenced to stiff prison terms. Still sensitive about the event, Mr Hudson notes that it probably couldn’t have happened six months later because new procedures were in place to reduce the possibility of such an event. Ironically, those changes were in the works when the crisis broke, proving that even the VSE doesn’t have a monopoly on market timing.

Where once the exchange was perceived to have been too easy on its member brokers, firms and their employees are now being penalized heavily for infractions of exchange by-laws. Although brokers tend to bitch about the tighter control, it’s generally accepted the degree of professionalism in the investment community has improved significantly in recent years.

A short time ago, one registered representative was fined a record $100,000 for an infraction — not as much as Ivan Boesky’s $100 million for insider trading on New York — but these things are relative. In any event, it’s safe to say the Vancouver broker is hurting the most. (Insider trading on New York is much more profitable).

Discussing the plan to automate, Mr Hudson says the present “open outcry” system will be replaced with something comparable to Toronto’s CATS system — with refinements of course to accommodate the idiosyncracies of the Vancouver market. Floor traders and board markers as they function today will almost certainly follow the dinosaur into extinction. For those remaining, their fingers will now be doing the talking — on computer keyboards.

Automation doesn’t come cheaply and approximately $6 million will be spent to convert over. According to Mr Hudson, automated trading is “certainly the wave of the future” and he notes the Sydney Stock Exchange has approached them for details of the new system. Australian stock exchanges are also closing the technology gap to remain competitive.

Besides executing trades faster, the new system will provide more accurate and timely quotations, better depth-of-market information and improved credibility, the exchange contends. If a broker has an automated system for handling orders it could be linked up with the VSE’s, he points out.

He admits there will probably be less floor traders after the conversion. And indeed there is some question whether those remaining will operate on the present trading floor because they could move into offices. Development stocks will be listed first and by 1989 all stocks should be on the system.

Criticism has been levelled at the exchange over trading by floor traders and professionals in general. Many junior companies argue they are being “nickel and dimed to death” by such practices, something the exchange is aware of. Claiming that pro trading “adds liquidity to the market” Mr Hudson estimates it accounts for 17% to 18% of the average daily market volume. He feels many of these complaints will be eliminated with automated trading because the “orders will be marked pro.”

His reaction to the new securities legislation brought down by the provincial government is mixed. The legislation is in line with other Canadian provinces, none of which have comparable markets to Vancouver. In his view the establishment of a B.C. Securities Commission (under chairman Jill Bodkin) is a good concept which will improve the credibility of the VSE. But there is a consensus that the B.C. government simply modified national regulations rather than creating new ones specifically for the VSE.

As an example, rules for private placements in Vancouver resemble those for larger companies in other jurisdictions whose markets are entirely different. The majority of financings in Vancouver are private placements so the application of these regulations could be harmful, he states. Discussions are under way to have these rules modified, he adds.

Private placements have almost doubled each year since 1984 and they represented 75.9% of the total $705 million raised by VSE listed companies in 1986. There are reasons for this. It’s faster, cheaper, and dilution is kept to a minimum because there is a hold period for the shares.”We don’t see any signs of abuse here,” he confides, adding that private placements allow “pools of funds to enter the public market place.”

Industrial sector stocks are playing a more important role in the market place and they represent about one third of the total listings. He wouldn’t be surprised to see their representation reach 50% which would help offset periods of low metal prices.

Many of these are “concept companies” with no developed product, he notes, admitting they are more difficult to assess than natural resource firms. Specialized consultants are hired by the VSE to analyze these situations and it has been quick to halt trading in such companies when any impropriety was suspected. One way of telling just how closely the exchange is watching a situation is by the frequency of news releases the company issues.