Technology and the capital markets

Zoomer | April 1st, 2000

There was a time when Canadians felt that the best place for their money was in a savings account. Times have changed. Now, roughly 40 percent of adult Canadians — many over the age of 50 — are involved in equity markets either directly by owning shares in a public company or, indirectly through mutual funds or pension funds. Clearly, our habits are changing. We are becoming a nation of investors.

One of the factors aiding this transition is technology. Nowadays, anyone with a computer and an Internet account has easy access to investment information. As consumers, we have seen a number of financial institutions move to offer a variety of “online” services.

Without a doubt, technology is modernizing the securities industry. Canadian markets cannot stand still. The challenge facing market regulators today is to incorporate the benefits of technology in a way that does not sacrifice market confidence or investor protection. The task is three-fold: “First, regulators must provide a framework where investor protection is a priority. Dealers must respect this framework and, finally, investors must be aware of the risks and understand their responsibility.”

Thiarticle will explore the impact of technology and the steps regulators are taking to build a framework that promotes investor protection while fostering competitive within the marketplace.

In Canada, the securities industry is regulated by provincial and territorial authorities dedicated to this purpose. The Canadian Securities Administrators (CSA), is a voluntary association of securities regulators from the ten provinces and three territories. Common among them is a mandate for investor protection. Securities authorities oversee Canada’s stock exchanges, self-regulating organizations and industry practitioners such as mutual fund dealers or financial advisors.

Technology and the marketplace

We read with interest, about the recent realignment of Canada’s stock exchanges. These changes saw the Vancouver and Alberta Exchanges merge to create the Canadian Venture Exchange (CDNX). The goal of CDNX is to provide venture companies with effective access to capital while maintaining a high level of protection to investors. In other key changes, the Montreal Exchange now specializes in derivative products while the Toronto Stock Exchange has been established as the senior equities market in Canada. These moves consolidate the market position of Canada’s traditional exchanges, and enhance their global competitiveness.

Technology led benefits include:

  • increased access to markets (for brokers/dealers);
  • the ability to compete over geographical boundaries;
  • the ability to handle an increase in the volume of transactions;
  • a seamless execution of the trade process from investment decision to completion;
  • increased access to information.

Behind the scenes, we’ve seen the elimination of trading floors and the introduction of Alternative Trading systems (ATS). An Alternative Trading System (ATS) can best be described as an “electronic” stock exchange. Quite simply, ATS is an automated matching system that enables brokers/dealers to fulfil transactions. Canadian Securities Administrators’ are moving to recognize ATS. This move will introduce competition for exchanges, and marks a fundamental reform in the structure of Canada’s markets. Alternative Trading Systems shift the concept of what constitutes an exchange.

Market regulation

Another way technology is having an impact on the marketplace involves the delivery of documents related to your investments. By using electronic media — in this case the Internet — a company has the ability to distribute information in a more cost effective, timely way than the current “paper-based system”. How you choose to receive this information is entirely up to you. The CSA has put in place legislation that supports this new means of communication without compromising investor protection. Companies remain obligated to provide for the “good delivery” of documents to investors. Among other requirements, this includes proof of delivery and security of documents.

Technology and you

Technology is also allowing investors new access to investments information and services. Firms dealing in securities may offer several levels or types of service. “Full-service” and “discount-service” are commonly used terms. As, implied, the client of a full-service dealer expects to receive a basket of services. A client opting for discount services typically turns to their dealer to execute trades. Compared to a full-service dealer, the main attraction of a discount service dealer is the lower cost. Often discount dealers provide their services online or over the Internet.

Despite the growing popularity of these services, many people remain unfamiliar with the machinery behind transactions carried out via the Internet. Say you want to buy shares in a public company you’ve been watching. To initiate the process you use the Internet to send an e-mail to your dealer. Your request goes into a queue, and is processed in turn. The speed of the actual transaction, or trade, is dependent on the capacity of your dealer’s electronic platform. If it is not up to the task, your order could be delayed or experience difficulty in trade execution. Moreover, orders placed late in the day may not be processed until the next business day, possibly at a different price than you had in mind. A good idea is to specify a time frame and a limit on the price you’re willing to pay on the security. The use of “limit” orders rather than “market” orders will allow you to restrict the time your order is outstanding and the price at which it will be filled. As a consequence, you may not have your order filled but this will help avoid surprises.

Full-service dealers, as well as discount service dealers are bound by the “Know Your Client” rule. In order to ensure that investors are well informed and protected, this rule calls for dealers to review each order against the client’s risk profile and other criteria.

Suitability Requirement

When providing investment services, financial professionals are bound by the “Know Your-Client” rule. This prohibits a dealer or advisor from recommending (or placing an investor in) an investment for which the investor is “unsuited”. Factors the dealer must take into account are: depth of investment experience, net worth, annual income, and investment objectives. The CSA is revisiting this suitability rule for situations where no recommendation or advice is given to an investor.

Investor information

If we want, we can check the price of a stock several times a day, or arrange to be notified every time a specific company makes the news. At the same time it is important to realise that our exposure to misinformation may be increased. Chat rooms and bulletin boards are not immune to rumours or false tips. A recent case in the U.S. saw one company’s share price rise 30 per cent — all because of a false posting on the Internet. The old adage “if it sounds too good to be true, it probably is” still applies to this new medium.

What Securities Regulators are doing

To our advantage, regulators are also using technology. CSA – sponsored initiatives are placing important information at our fingertips, for example:
  • System for Electronic Document Analysis and Retrieval
    •  (SEDAR): All publicly traded companies are required by securities regulators to report on their business activities. This information (including annual reports and company news releases) is available free of charge at www.sedar.ca.
  • Insider Trade Reporting System
    • : To ensure a fair marketplace, Insiders (senior company officials) are prohibited from trading their shares of company stock in certain situations. Up-and-running later this year, this database will enable investors to easily find out about the trading activities of company insiders.
  • National Registration Database
    • : In order to do business with you, security industry professionals must be registered with your provincial or territorial securities administrator. Planned for early 2001, this database will tell you how and where your dealer or advisor is registered.

You the investor

So, what does this all mean to the 50-plus investor? In part, technology has increased the individual investor’s participation in capital markets. Recognizing this regulators are mindful of the heightened importance of investor protection. The best-protected investor is a well-informed investor. To this end, securities regulators are improving prospectus disclosure and access to information as well as boosting their support for investor education.

Securities regulators are marking The 3rd Annual Investor Education Week Campaign from April 10-14, 2000. International in scope, the campaign is led – in Canada – by the Canadian Securities Administrators (CSA). Get the facts. It’s your money. It’s your future.

Canadian Securities Administrators

Alberta
Phone: (403) 297-6454
www.albertasecurities.com

British Columbia
Phone: (604) 899-6500
www.bcsc.bc.ca

Manitoba
Phone: (204) 945-2548
www.msc.gov.mb.ca

New Brunswick
Phone: (506) 658-3060

Newfoundland
Phone: (709) 729-4189
www.gov.nf.ca

Nova Scotia
Phone: (902) 424-7768
www.gov.ns.ca

Northwest Territories
Phone: (867) 920-6354

Ontario
Phone: (416) 593-8314
www.osc.gov.on.ca

Prince Edward Island
Phone: (902) 368-4569
www.gov.pe.ca

Quebec
Phone: (514) 940-2150
www.cvmq.com

Saskatchewan
Phone: (306) 787-5645

Yukon
Phone: (867) 667-5005