Lauren M. Dobbie

Archive for February, 2011|Monthly archive page

Love and economics are in the air in Canada

In Uncategorized on February 14, 2011 at 4:48 pm

Love is certainly in the air in the world of Canadian finance but like any relationship or marriage it’s not without its points of contention either. The Toronto Stock Exchange and the London Stock Exchange have proposed that they merge which will change the scope of stock markets in both countries.

Now, for two people to truly stay together there have to be reasons other than “the flame”. As a hardened economist I don’t believe in people being in relationships without real reasons and real incentives, so why are the TSX and the LSE coming together?

The foremost reason is that business in general is becoming more globalized practically by the day. What’s stopping a Canadian stock trading company from attracting potential shareholders overseas? Well, nothing. But it would sure be a lot easier with a partner over there, namely the LSE. Publicly traded companies in Canada will have access to British markets and vice versa, which is a huge incentive for both to merge.

Many people would probably say that facing the challenges of life together in a partnership is more desirable than facing them alone. In this way, economics and love are no different. The TSX and the LSE both face competition from other stock trading companies. Therefore, combinging both companies allows for both to capture more market share in both markets. The TSX and the LSE individually face the risk of competition over-taking more and more of the shareholder market but together they could in fact retain and even increase their market power.

The financial benefits of a partnership are also very important incentives to come together and stay together. Sharing expenses, combing incomes, and having greater access to capital markets are typical benefits of going through life in a pair rather than alone. Here again the stock trading world is in the same boat. One of the hypothesized benefits of this merger for the people who buy stocks is that the transaction costs of buying and selling stocks will decrease.

Now, there are two sides to every story and there is almost no economic or personal decision that doesn’t come with at least a few potential concerns. One of the biggest challenges of any partnership of any kind is the difficulty surrounding comprimise. “You cut one hole in the bag of milk and I cut out two… So what do we do now?”  is not the kind of comprimise to which I’m referring unfortunately. Yet, in the same breath it’s not fundamentally far off either. Whenever two economic processes come together there is going to be some overlap and some major differences too. What I’m getting at is how this new company (which is operating under the temporary name “Holdco” for “holding company”) will be run is going to take more than careful thought. The administrative thickets are going to be sharp and well, thick at the bottom. It’s not so much the broad outlook of what will happen once these companies merge that’s giving people grief– it’s the operation of the thing that’s making a few people sceptical. However, even once the merger happens (if it happens) the TSX and the LSE will still operate individually even though the companies will be joined, so it’s not like this is just a disguise for England taking over our sovereign stock exchange. Besides, big guys in the Middle East have huge stakes in both companies and will end up owning almost a quarter of “Holdco” anyway (source: The Globe and Mail).

All in all, there are lots of details to be ironed out in terms of how this company will run and on the Canadian side Ottawa’s industry minister Tony Clement is in the process of reviewing and (maybe) approving this merger, so rest assured this major deal will only go through if there’s something in it for us.

Love conquers all. So does economics.

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