As he steps back from his role as CEO at CBOE Canada, the avowed change-maker highlights the issues he thinks stakeholders in Canadian capital markets need to address
Jos Schmitt spent his career making changes on Canadian capital markets. The co-founder and former CEO of the NEO Exchange — now CBOE Canada — and former founding CEO of the Alpha Exchange has pushed forward competition and innovation on exchanges. Those include the launch of Canadian Depository Receipts (CDRs) and a mindset shift on exchanges towards more service oriented businesses.
Despite his wins, Schmitt sees challenges ahead for Canadian capital markets, and a strong need to address them. He shared with WP some of the areas he thinks advisors and leaders in Canadian capital markets need to be aware of. Those include the need for consolidated market data, changes in Canadian short selling practices, and a shift in derivatives trading practices. Fundamentally, he wants to see Canada move towards a more open and globally integrated model of securities trading, one that he thinks meets the direction the world is still heading in. It’s a goal he was already working towards with CBOE.
“One of the key parts that CBOE was interested in, and what I spent time with them discussing before the acquisition and executing upon it afterwards, was to design and build the foundations of a global listings business,” Schmitt says. “Many people call that the Holy Grail, but it’s getting there. You see it in the corporate listings business in the US. The initial blocks are in place in Europe and getting there in Australia. I think bringing that real global integrated listings solution supported by a global trading and market data solution, I think that is the next thing, and it will be there, it is real.”
In working towards that goal of global listings integration, Schmitt wants to see Canada improve access to consolidated market data. Canada lacks the kind of consolidated market data that investors in the United States have through the Securities Information Processor (SIP), which is co-owned by the various US exchanges. The SIP consolidates data from all the exchanges because securities are traded across a multitude of venues. The SIP makes that consolidated data available to all industry stakeholders, giving US investment advisors a consolidated view of the full US market. It doesn’t matter where your security is traded, a US advisor will have a full view of the bid/ask spread on that security, its last sale price, and the volume traded. Advisors in Canada don’t have that view of our markets.
Schmitt explains that in Canada, both advisors and discount channels are limited to data from the exchange on which the security is listed. While those securities can trade on over 10 other Canadian venues, if a security is listed on the TSX advisors and investors can only access its price, spread, and volume from the TSX, regardless of the way it has traded on another venue. Schmitt says that cost and lack of regulatory intervention are the key issues. Nevertheless, without that consolidated data investors and advisors have only a partial view of the market. They could be making decisions based on a perceived lack of liquidity in a security, only to find out that its TSX volume only comprised 20 per cent of the total volume traded that day. As well, if the listing exchange is down for any reason, retail investors and advisors are unable to transact due to lack of market data. Other professionals, however, can stil ltrade on many other venues. The US system is protected against such an eventuality.
Fundamentally, Schmitt sees consolidated data as an issue of informed decision making. Without this shift, he thinks that Canadian investors and advisors cannot make fully informed decisions.
Beyond the issue of consolidated data, Schmitt sees other topics that must be addressed on Canadian capital markets. Among them is a shift in Canadian short selling practices. While he is not opposed to short selling and sees it as part of the price discovery process, he describes some aspects of Canadian short selling as “predatory,” as regulations haven’t been strengthened the way they have in the US or Europe. The reticence to change those regulations, Schmitt says, often come with a sense of ‘why would we change what we’ve always done.’ Schmitt argues that there needs to be change because without stronger regulations investors are more exposed to potential harm.
Schmitt also highlighted the need for a more robust Canadian derivatives market as he discussed the challenges still ahead for Canadian capital markets. Derivatives, he says, are a key component in good portfolio management, but Canada lacks a meaningful derivatives market. Comparing Canada to the US, and accounting for each country’s relative market size, Schmitt still sees Canada underperforming. Schmitt wants to see greater volume traded in Canadian derivatives markets, and their yield enhancement and capital protection traits made more widely available to Canadian investors.
As advisors look at these issues and advocate for their clients’ interests on Canadian capital markets, Schmitt believes they need to become agents and embracers of change. By embracing change and taking agency for its management, advisors can help improve the state of Canadian capital markets.
“As an advisor you have to embrace change and stay up to speed with it,” Schmitt says. “You can’t just look at your clients, the people who trust you with their money, and tell them they need a 60/40 portfolio. There are a multitude of instruments out there and you need a good understanding of what they are. Are they fixed income, stocks, derivatives, ETFs, or some of the new structured products out there. Those are the key instruments that will allow you to optimize your portfolio to the needs of your clients.”
