EDITOR: | March 1st, 2016

Adam Smith Invisibly Steers this Ship

| March 01, 2016 | No Comments

WebIn a free and open market, it’s funny what annoys people.

I’ve written articles on marijuana, mining, finance, shareholder rights, AntiSpam Legislation, shareholder silliness, human resources, gaming, hi-tech, no-tech and BigData. I’ve challenged under-performing management and boards, unpopularly defended those who I thought needed defending, and encouraged shareholder activism.

The lithium crowd isn’t known for tolerating any challenge to the Myth of Tesla, so I thought the article questioning the wisdom of lithium in batteries for electric vehicles was going to receive some angry commentary. I was wrong. Instead of hostility, what followed was polite debate by email across continents. (I’m going to continue this conversation in person at the 5th Annual Cleantech & Technology Metals Summit conference in Toronto in May – I’m still not convinced lithium is the answer.)

The article on Death in the Marijuana Market met the expected unreceptive audience. That one generated my first quasi-death threat! It seems not all marijuana advocates partake of the calming herb.

Sometime articles came and went without much passion for or against. Thoughts were exchanged, ideas were explored, time went on.

Then came the article that generated the most angry feedback of them all. What issue got so many people worked up?

I publicly supported the TMX Group’s efforts to rehabilitate the market.

Really, people?

For the first time, roughly half of the communications I got in response to an article were aggressive, bitter and judgmental. The comments ranged from an almost polite, “Have you lost your mind?” to much less genteel observations on my family lineage, obvious in-breeding and resulting regression of intelligence. The overarching commentary was that the TMX Group is only acting like it cares, the White Paper is a charade, and we’re doomed.

Who knew that much Bay Street angst sat out there, waiting for a target?

But, hey, lemons and lemonade. All those sour faces made me wonder why they were so angry at the Exchange, and what if they were right?

Why are so many people angry at the Exchange? I canvassed some of my market contacts for their anonymous opinions on this:

  1. The Market is down. The Exchange = the Market. Therefore, my loss of capital is the Exchange’s fault;
  2. It is by far the largest, most successful stock exchange in Canada, now controlled by a consortium of large banks. We generally hate the banks, even though we love what they do for us, so hating the Exchange is an easy extension of hating the banks;
  3. We also hate monopolies;
  4. For years, the Exchange didn’t do much to support the average investor. Converting to a for-profit company only made the Exchange’s behaviour more punitive, leaving many market participants feeling disenfranchised;
  5. A combination of a near-monopoly on trading and a stranglehold on market data did not give the Exchange any reason to treat its members as anything other than ATM machines. People have been abused by the Exchange, and this is a chance to return the favour. Kick ’em when they’re down!;
  6. Past attempts to rehab the market were half-measures, insincere gestures made only to satisfy the government agencies having oversight;
  7. Some of the policies are antiquated, pointless or harmful. They need to be changed. The Exchange hasn’t done that yet; and
  8. It’s easy to rant at “the Exchange” as an depersonalized faceless tyrant. It would be harder to personally rant at the humans who work there.

My personal experiences with the Exchange and its components go back over 20 years as a lawyer, investment banker, registrant, insider and shareholder. Despite some real conflict over the years, I can’t think of a single “bad” person that I’ve ever dealt with there. Everyone I’ve dealt with has been fairly well-informed and well-meaning, and helpful as much as possible within the confines of the policies. The problem is, institutional applications of those policies on occasion resulted in illogical decisions that negatively impacted issuers and shareholders. Conversations with peers show that my experience is not unique.

All of these reasons have some degree of legitimacy to them. The Exchange has historically brought some of this anger upon itself. But being angry today at the TMX Group for past sins real and imagined is about as helpful as getting mad at your uncle for not liking your meatloaf at a family dinner two decades ago. It’s time to let go.

What we need to do is focus on the future and on solutions.

We could take a cue from the province of Ontario and its Mineral Development Strategy. Rather than sit and wait for the resource world to pass it by, Ontario has come out with a 10 year plan, “to become the global leader in sustainable mineral development and production”. The plan sets out four strategic priorities and ten action items to reach that goal. Good for MNDM in being a leader in this.

We could also look to the venerable Prospectors and Developers Association of Canada, aka, PDAC. Established in 1932 and the host of the annual Greatest Mining Show on Earth, PDAC has long been a strong voice for the community. As always, PDAC put together pre-budget submissions for the federal government to consider, and has been actively lobbying government agencies for more assistance to the broader mining industry. PDAC didn’t sit and wait – PDAC acted.

So while it’s easy to dismiss the TMX’s Group’s actions, at least they’re doing something.

And more than merely “doing something”, there is a compelling economic reason to believe that this time it’s different, this time the Exchange’s reforms will have more positive influence on market performance. That reason can be found here in the TMX’s Feb 11 press release.

That’s the release that discussed the group’s financial performance. Relevant highlights on a quarter-over-quarter basis:

  1. revenue was down by $5M ($177M in Q4/15 compared to $182M in Q4/14);
  2. diluted loss per share of $2.92 in Q4/15 vs earnings of 76 cents in the same period last year. That’s a swing in the wrong direction of $3.68 per share; and
  3. income from operations fell to $52M vs Q4/14’s income from ops of $67M.

The other key indicators tell the same story: the TMX Group is suffering financial pain, and the commentary makes it clear that pain comes mainly from the lag in the natural resource sector. From Michael Ptasznik, CFO: “In the fourth quarter, we continued to be impacted by the downturn in the resource sector.”

That’s why I believe the Exchange’s reforms this time around will be more meaningful, more realistic, more impactful. In this protracted resource market downturn, the Exchange is looking at its financial health and knows that anything less than a committed response will lose it market share to other global exchanges. The Exchange isn’t helping out of any sense of altruism – it’s fighting for its survival.

This also means we can see Adam Smith’s invisible hand at work here. Individual action by the TMX Group for its own competitive advantage will yield benefits to other market participants. This living example of neoclassical economics is something we should all get behind, not criticize, even if like the Exchange we’re doing it only out of self-interest.


Mr. Clausi is an experienced investment banker, executive, director and shareholder activist. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, ... <Read more about Peter Clausi>

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