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KMW Blog Apr 30, 2016: Zombies, Sleepwalkers and Zombie Slayers


Posted: Apr 30, 2016JK: Zombies, Sleepwalkers and Zombie Slayers
Published: Apr 16, 2016HSC: Uptick Rule and Naked Short Selling

In a This Week in Money with Jim Goddard audio interview on April 16, 2016 (Uptick Rule and Naked Short Selling) produced by Tom Allen's HoweStreet.com, I discuss the problems created by market fragmentation such as facilitating investor risk capital stripping by algo traders and the demolition of the "first come first serve" trade execution principle venture investors, especially retail investors, hold dear. I argue that as long as competing market order books are allowed, the uptick rule cannot be reinstated because with multiple order books that brokers are mandated to navigate in search of the "best fill" it is impossible to prove that the uptick rule was not violated. I make the suggestion that the TMX Group should decide that its venture listings henceforth would be exclusively confined to the TSXV, and petition the government to allow an exemption from alternative trading systems. Since 90% of the TSXV's pitiful value traded goes through the TSXV order book, bannishing the alternative trading systems would cause far less business harm than their continued presence causes to the overall Canadian resource junior eco-system. Without the alternative order books, every trade goes through a time-stamped pipeline and functions as a benchmark to establish what the last different traded price was (the uptick rule decrees that you can only sell short when the price you are selling at is higher than the last different traded price). The short selling uptick rule can be reinstated if the TMX Group decides that a venture capital exchange is a fragile eco-system that deserves protection from the predations of any out of control trading culture. On April 30 This Week in Money with Jim Goddard interviewed John McCoach, CEO of the TSXV, with a similar set of questions (The Uptick Rule: Regaining Investor Confidence). Although McCoach has announced his plan to retire as head of the TSXV at the end of 2016, which should make him less worried about who signs his paycheck, he answers most questions cautiously. But he is emphatic in his belief that venture capital markets such as the TSXV would be better off with an uptick rule for short-selling, or at least a no-short selling on a down-tick rule. As I do, he disagrees on banning short-selling. He does suggest that it is IIROC which is behind this policy. He also thinks a single order execution platform is preferrable to the current fragmented system where the TSXV executes about 90% of the volume traded through 13 platforms. But he acknowledges that it is hard for the TSXV to argue plausibly for a "monopoly" even if that would create a more fair playing field for retail investors who value the concept of "first-come-first-serve". In this case he puts the blame on the competition agenda of Canadian regulators. On the topic of "zombie companies" he is understandably not enthusiastic about the suggestion that listing fees be suspended until the listing is viable again, and pretty much against getting rid of "insolvent" listings. McCoach is generally quite reasonable with his views, and I believe that he has been unfairly blamed for the structural problems afflicting Canada's venture capital market by people frustrated by the apparent lack of any sponsor behind the war on Canada's juniors. It would be nice if there were a handful of evil chortlers behind the scenes engineering the demise of the juniors, but I suspect that the "war on juniors" is likely the effect of a well-meaning but sleep-walking Canadian financial services-regulatory system.

 
 

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