Why the TSX Venture is Failing

Most of you probably invested in a company listed on the commodities-focused TSX Venture, owned and operated by th TMX Group (TSX:X.TO - News) within the last year, which means most of you probably lost some money.

On a year-over-year basis, the TSX Venture is down 30%, trading volume down around 25%, and transactions are down more than 45%.

While the commodities and precious metals market have slumped due to falling prices and rising costs, many of the companies that have fallen have not dropped because of core fundamentals.

The TSX Venture as a whole has succumbed to more than just a down-dip in metal prices or the rises in costs of production and exploration. This letter is intended to address some of the issues that have led to the crash of the TSX Venture.

These issues include how the big banks are forcing juniors out of the market, just like they have in the US, and also how one regulation has turned into a death spiral event leading to other regulations that collectively are crushing our Canadian market.

Once you read this, you may look at things very differently.

It’s important that Canadians know what is really going on.

Transparency in Trades

The biggest and most important aspect of any stock-trading platform is transparency.

Investors should be able to see exactly how many bids and sell orders are available for a stock at any given time – especially for an exchange that has minimal liquidity and therefore much easier to manipulate. This is how investors calculate at what price he/she should place a buy or sell order.

The depth of the market can be seen using a paid service called Level II that gives you access to the order book in real time. I have always said that anyone who trades should pay for such a service. However, even with this service, you’re far from being protected.

Especially since regulators decided to enforce what they believe to be fair competition on the TSX and TSX Venture…

Multiple Trading Platforms

Many retail investors I speak with have no clue that there are multiple parallel trading platforms for the stocks they buy in Canada.

Canadian regulators forced the TMX Group, the parent of the TSX and TSX Venture exchanges, to allow trading through alternative trading systems operated by third parties because they felt there should be fair competition in the market of buying and selling stock in Canada.

As a result, there are now many alternative market centers that process trades for stocks listed on the TSX and TSX Venture. Some of these include Alpha Trading Systems, Chi-X Canada, Pure Trading, Omega ATS, and dark pool Match Now. According to Stockwatch:

“Alternative trading systems in Canada handled 33.7 per cent of trading volume during the week ended May 3, 2013.

…The Toronto Stock Exchange and the TSX Venture Exchange handled the other 66.3 per cent.

…Looking at securities listed only on the TSX, the exchange captured 61.2 per cent of volume. Chi-X handled 18.3 per cent, Alpha had 11.7 per cent and together the other ATSs handled the rest, 8.8 per cent.”

As you can see, these alternative trading systems handle a large portion of the trading volume in Canada, yet most regular Canadian investors don’t see this because most quote systems do not include transactions from all of these different platforms.

Furthermore, while volume of trade can be seen by the select few quote platforms that incorporate the volume between these exchanges, none of them combine them in the same bid/ask level II depth because they are being traded on different platforms via parallel order books.

In other words, while you may be trading a stock on one platform, that same stock is being traded on different platforms at the exact same time. This not only removes transparency – especially for the average retail investor – but it also removes visible liquidity for any particular stock.

The retail investor using his/her online trading quote system doesn’t stand a chance – especially when playing on a exchange with little volume, such as the TSX Venture.

But if parallel order books are such an issue, why is it allowed?

Fair Competition

Canadian regulators often do too much in order to solve problems where none exists.

Their job is to protect investors but sometimes their actions have repercussions that actually end up doing the opposite.

Regulators believed they were doing the right thing in the spirit of fair competition by forcing the TMX to accept alternative trading platforms.

However, not only did this cause transparency issues for investors, but it also created a domino effect of other problems that regulators tried to combat with other regulatory amendments.

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