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Trading Canadian Stocks
Trading Canadian Stocks
From our point of view, the most important issue for trading Canadian stocks is cheap and efficient order execution.
Canadian Residents - lots of options
If you are a Canadian resident you should have no problems finding a brokerage firm in Canada which is a member of the TSX Group, the umbrella for the TSX and TSXV exchanges. TSX membership is required for direct access to the order execution system, which is the key to trading speculative Canadian securities efficiently and cheaply. Click Here for a list of TSX Member Firms.
US Residents - not many options
US residents have a tougher time achieving this goal. Canadian brokerage firms are no longer allowed to have US clients unless the firm and broker are registered in the US client's state. Few full service Canadian brokerage firms have taken the trouble to get registered in the 50 American states. The large Canadian discount brokerage firms which are registered in the United States have not provided a facility for cheap and efficient trading of speculative Canadian stocks.
Why do US brokers hate to trade Canadian stocks?
US brokerage firms usually do not have direct access to the TSX order terminal, charge high commissions for Canadian orders, exploit currency exchange spreads, dislike the Penny Stock Rule paperwork, and are leery of taking orders for Canadian securities not blue-skied in their state. While some Canadian companies have registered in the United States at the federal level, very few will have fulfilled state level registration requirements. The United States is a highly litigious society, and given that the courts generally favor the client's word over that of the broker, even accepting unsolicited orders for a speculative Canadian security is problematic for an American broker. Most American brokers simply refuse to trade Canadian securities.
Kaiser Bottom-Fish Online focus - high risk speculative Canadian securities
The primary focus of Kaiser Bottom-Fish Online is speculative securities listed on the TSX and TSXV exchanges. We believe the Canadian exchanges and regulators offer a better online disclosure system than their US counterparts, enforce disclosure more effectively, and provide a superior order execution platform. Our target audience consists of investors who wish to be responsible for the high risk speculative portion of their investment portfolio. But we do recommend that every investor consult a registered financial advisor licensed to do business in their state or province with regard to how much, if any, financial exposure he or she should have to an asset class that carries the risk of sudden and total loss. We are not registered investment advisors.
Once you know how much capital you wish to have at risk in speculative stocks, you need solutions to two key problems.
Problem One - generating speculative investment ideas
The first problem is a source of ideas and the tools to both monitor and analyze your speculative investments. Ten years ago the brokerage industry had a monopoly on the solution to this problem, but this information monopoly has been broken by the Internet. Today there are numerous free and fee-based online resources which enable you to track and research your investments. Many brokerage firms do provide online resources for their clients, but generally these resources do not delve into the arena of speculative stocks.
Kaiser Bottom-Fish Online has been designed as an independent research portal to help investors manage the speculative portion of their portfolios. Our goal is to educate investors about the risks inherent in speculative plays, and to provide a framework so that investors can better assess the risks associated with speculative plays. We do not provide personal advice; you must make your own decisions or consult a registered advisor. Finding a broker knowledgeable about speculative Canadian stocks is difficult. Because there are a couple thousand speculative juniors, knowledgeable brokers will tend to specialize in a small group of companies in whose management they have confidence, or the companies that the brokerage firm has financed and supported with research coverage. If you generate your speculation ideas independently, especially "bottom-fish" type picks, the odds are that most of the time your broker will not be able to provide any informed feedback. If you are willing to speculate in Canadian securities, you should recognize that you are largely on your own.
Problem Two - cheap and efficient order execution
The second problem is getting efficient and cheap order execution for your trades. The Canadian exchanges do not permit online order execution. Online trading is possible for US stocks, but "online trading" is a misnomer because retail client orders still get handled by market makers or floor traders between placement and execution.
What makes electronic order driven trade execution systems special?
The TSX system is an electronic order driven trade execution system. What this means is that buy or sell orders are keyed into an electronic order book by a licensed broker trained to operate the order terminals. Unlike quote driven order systems such as NASDAQ and the New York Stock Exchange where market makers match orders as they see fit, order driven systems handle orders on a first come first serve basis. Once an order has been entered, it joins the queue of other buy or sell orders. This queue or order book is visible to anybody with access to an order execution terminal. It is also known as market depth. Once your order is in the order book, there is no risk of front-running by dishonest brokers, specialists and market makers as there is in the US markets. The TSX does not allow unlicensed individuals access to this order execution system because it has no room for error and is vulnerable to abuse.
Market Depth is critical for investors who wish to trade speculative securities efficiently. Sadly, the people who run the TSX think this information should cost an arm and leg. The TSX used to provide free 15 minute delayed online market depth for TSXV listings, but dropped it when the TSXV order execution system was merged with the TSX system. The explanation given was that the new TSX platform did not have the technological capacity to provide this service. Real time market depth is available, but the cost is prohibitively expensive for anybody but full time and professional traders. Until April 2003 delayed market depth was available through fee based online services such as Stockwatch Canada, but it has since been withdrawn by the TSX without explanation. 15 minute delayed market depth is useless for active stocks, but it worked fine for thinly traded securities, which represent the majority of TSXV listings. The decision to deny investors free access to delayed market depth is just plain stupid and points to a serious philosophical problem in the TSX's attitude toward the investing public and its speculative venture capital market. Market transparency encourages liquidity. The easier it is for investors to see market depth, the more likelier they will be to place orders. The more buy and sell orders in the order book, the smaller the spread between bid and ask, and the greater the liquidity of listings. By making market depth so expensive only professionals can afford it, the TSX is shifting the burden of providing market depth information to investors onto the shoulders of brokers. This injects unnecessary inefficiency into the market. The natural human response to wasted time is to avoid it, with the consequence that the order books for TSX listings will become thinner. As liquidity dries up it becomes more difficult for TSXV listings to raise capital to fund their projects. Starved of capital TSXV listings gradually wither away and disappear. Is this the goal of the TSX and TSXV management? Why not contact the TSX and ask?
Placing orders to buy or sell Canadian stocks
The key to efficient trading of Canadian securities is a broker who can instantly check a stock's market depth while on the phone with you, and execute the order the moment you give buy or sell instructions. The most efficient order to place is a limit order to buy or sell a certain amount of stock at a maximum or minimum price. Order execution is almost instantaneous. Whatever is not filled stays in the queue at the limit price. Before placing the order you should specify it as a day order or "good-til-canceled" order. Open orders get flushed out of the trading system at the end of the month, so you must give your broker fresh instructions at the end of the month.
Understanding TSX freeze controls
Be forewarned that although the order system is "what-you-see-is-what-you-get", actual orders are executed on a "first-come-first-serve" basis. Another order entered a split second sooner will be executed first. This is a significant risk with actively traded stocks. Also be forewarned that the order execution system has embedded controls which will freeze order execution if an order trips certain flags such as creating a substantial price increase or drop. This freeze control is designed to prevent keypunching errors from unintentionally disturbing the market as well as deliberate attempts to "spook" or "goose" the market. With thousands of trigger happy brokers and investors watching the market, freeze control makes a lot of sense. An experienced broker will usually warn you if your order may trigger freeze control.
If a broker cannot tell you how much stock you can buy or sell up to or down to a certain price, and then tell you within seconds how much you bought or sold, all during the same telephone call, you don't want that broker.
Beware of brokers who try to talk you out of selling
If a broker tries to talk you out of a sell order without you asking for his or her input, you need a different broker. Selling a speculative position, whether it is winning or losing, is hard enough to do on your own. You don't need your broker to make it tougher. But you should at least think about your broker's warnings about buying a particular stock. It is almost always easier to buy a speculative stock than to sell it!
What about cheap order execution?
Canadian brokerage commissions have been deregulated. As a rule, the smaller the value of the order, the higher the commission percentage. How much of the broker's time you waste also makes a difference. If you use your broker primarily as an efficient order execution machine, you should pay less than if you treat your broker like a full service broker. The smaller your account, the less attention you will receive. Strange as this may sound, the smaller an account, the more high maintenance the client will tend to be. If you are the sort of person who calls a broker for quotes instead of looking them up online, or calls to yack about this or that, or whine about bad trades, you better have a very large account. If not, you are pretty much stuck opening an account with a discount broker.
Beware of portfolio value fee based "asset gathering" brokers
The Canadian securities industry is increasingly dominated by the banking establishment whose goal is vertical integration of all financial services. They want to offer you one-stop financial shopping. Their brokers are officially called "financial advisors" or "full service brokers". Unofficially these brokers are called "asset gatherers". Their goal is to pull as much of your financial assets and liabilities under the firm's umbrella as possible. Many such accounts are charged an annual fee based on the value of the account, with only nominal commissions charged on transactions. This shift away from transaction based compensation to asset based compensation is the wave of the future. It is changing the way brokers and clients interact. (It is also changing how Canada's venture capital market works, but that is a separate topic.)
An asset gatherer broker will gather information from you about your financial situation and objectives. He or she will use asset allocation theory to design an appropriate portfolio. Most likely the portfolio structure will be generated with the help of questionnaires and software. The broker will recommend investments for each asset class from lists provided by the firm's research department. Mutual funds will be the most common security recommended. Once your portfolio is set up the broker will monitor its performance and periodically recommend adjustments. The broker wants to see your portfolio's value grow, and spend only as much time interacting with you as is needed to keep you from moving your account elsewhere. Once you start to take advantage of the financial institution's other services, such as banking and insurance, it becomes more complicated to move your investment account. You do not want an asset gatherer broker at a bank controlled financial institution for your speculative portfolio. Such a broker will be ignorant about speculative markets and discourage you from making speculative investments. Such a broker will want to spend his or her time finding new clients whose assets can be gathered into the firm's fold. The less you bother an asset gatherer with trading ideas, the happier he or she will be with you. Furthermore, do you really want your banker to have your speculative trading activity at its fingertips? If you have an asset gatherer style broker, and wish to allocate a portion of your portfolio to speculative investments, discuss your wishes with your broker, figure out what percentage of your portfolio you want in high risk securities, and respect your broker's efforts to keep your high risk exposure limited to that percentage.
US Residents and the Penny Stock Rule
During the nineties the SEC invented the Penny Stock Rule in response to market abuses carried out during the eighties. A "Penny Stock" was defined as any security trading below US $5 that was not listed on an approved American stock exchange or NASDAQ. Securities listed on the OTC Bulletin Board, small American exchanges like the Denver Stock Exchange, and the junior Canadian exchanges such as Vancouver and Alberta, became subject to the Penny Stock Rule. The broker was required to obtain paperwork from a new client acknowledging the high risk nature of a penny stock purchase for each of the first three orders. The rule was designed to discourage misleading representations from the broker regarding the risks associated with a speculative stock. A common market abuse was to pitch penny stocks to investors for whom high risk investments were entirely unsuitable. The paperwork was a hassle which encouraged US brokers to discourage clients from trading penny stocks. Ironically, this attempt to demarcate a class of speculative securities may have contributed to the nineties market bubble where NYSE and NASDAQ listed stocks trading well above $5 became the market's preferred class of speculative stocks. Do names like Nortel, Enron, AOL, and Worldcom ring a bell? In any case, unless a US resident buys a ridiculously overpriced Canadian speculative stock, he or she can expect to fill out the Penny Stock acknowledgement form for the first three purchases of a Canadian stock. This paperwork is not required for new accounts at any of the discount brokerage firms because by nature all orders are deemed to be unsolicited.
What options do US residents have for trading Canadian stocks?
Our key criteria are that the brokerage firm must be registered in the US resident's state, the firm must have brokers available with direct access to the TSX order execution terminals, and transaction fees must be reasonable.
I am not aware of any discount brokers that meet these criteria, but the following full service firms do to the best of my knowledge. These referrals are provided only as a courtesy to visitors of Kaiser Bottom-Fish Online, and do not constitute an endorsement of the brokerage firm beyond meeting the basic criteria. Our referral is not for any particular broker; the individual to whom a potential client is referred is a matter internal to the firm and unknown to us. Potential clients are responsible for conducting their own due diligence on the brokerage firm and its brokers. No compensation arrangements exist or are contemplated for these referrals, which we reserve the right to remove from Kaiser Bottom-Fish Online without any cause or explanation.
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