TSX Venture Exchange revamps business model in light of commodity downturn

Share

The commodity downturn has dealt a blow to the TSX Venture Exchange, a marketplace for emerging companies, in recent years.

Lagging prices for gold, oil and other resources have left investors wary of financing junior mining and energy companies, which make up about 70 per cent of the listings on the exchange.

The S&P/TSX Venture Composite Index is down more than 70 per cent from its March 2011 highs, despite a rally in commodity prices that has boosted it nearly 30 per cent this year.

The volume of shares traded on the market has also been steadily slipping. Last year, 32.4 billion shares were traded on the Venture Exchange, down more than 25 per cent from 2008.

"The TSX Venture has been in a bit of a free fall for about five years," says Ian Russell, president and chief executive of the Investment Industry Association of Canada.

Another problem, according to Russell, is that the exchange is littered with dormant companies, leaving it looking more like a graveyard than an active marketplace.

"These are companies that aren't generating earnings or profit," says Russell.

"They're not growing. They're just zombies that stay listed on the exchange for whatever reason. I think that creates confusion, particularly for investors."

Late last year, after months of consultations with various stakeholders, the Venture Exchange announced it was planning a number of changes to address some of the issues it's been facing.

However, a mass delisting of these zombie companies is not among the 25 initiatives that the exchange has proposed as part of its "revitalization" plan.

The exchange did consider the idea, but ultimately decided that its current listing standards suffice, says John McCoach, president of the TSX Venture Exchange.

"We shouldn't be moving the goalposts around on companies based on individual market cycles," says McCoach, noting that the exchange already moves companies that fall below its listing standards to the NEX board.

The NEX allows companies that have become inactive to continue trading in the hopes of returning to the junior exchange.

Instead, the exchange is focusing its efforts on trying to attract more investors, diversifying its listings to be less resource-heavy and reducing administrative costs for issuers.

Revamping some of its policies to tailor them to non-resource companies is one example of how the exchange hopes to attract companies from a broader array of industries, says McCoach. That, in turn, could help lure more investors.

"Part of it is that we need to do a better job of showing that the exchange is already quite diverse," says McCoach.

"We have over 500 companies that are in many different sectors that are not related directly to natural resources — technology, life sciences, real estate, financial services, clean technology."

Advocating for changes to short-selling rules wasn't initially part of the plan, but it has since been added to the list of priorities, after members of the junior market community expressed concerns that predatory short-selling is hurting them.

The exchange is asking the Investment Industry Regulatory Organization of Canada to bring back something called the uptick rule, which restricts the price at which a stock can be sold short. IIROC did away with the policy back in 2012.

"Early stage companies are typically not as liquid as larger-cap companies, and shorting can be quite disruptive to the valuation," says McCoach.

"So if a company is trading at 50 cents and someone is aggressively shorting that stock, they can have a much bigger impact than if someone is aggressively shorting a $50 stock."

In a progress report published in March, the exchange said it is making good headway on its priorities.

"Moving 25 significant tactics forward is a job in and of itself," says McCoach.

"But they're moving forward, they're on track, and I'm very pleased with the progress."