PrefBlog

4 Responses to “February 16, 2011”

1. Drew says:

   February 17, 2011 at 11:49 am

   I think you are exactly right to question whether regulatory functions should be performed by an organization the principal objective of which is to maximize profit. When in the relatively recent past ownership of the TSX moved from it’s “members”, being the brokerage community, in my mind it became indefensible for the securities commissions to leave the TSX with the regulatory function it previously held. This is because the goal of profit and the goal of the public good can and often do conflict in ways that are insoluable. By moving ownership from the brokerage community the TSX ceased to be, in a sense, part of the equipment of the brokerage community, not unlike the computers on brokers desks, to being any entity independent of them and existing for the sole purpose of maximizing profit.

   That said, I disagree with your disagreement with the following proposition: “Entrusting this decision to self-regulating exchanges is suboptimal because as with any public good, the social costs exceed the private costs.” This proposition is simply an extension of the view I’ve expressed above, namely that there are often circumstances where the goal of maximizing profit conflicts with the goal of maximizing social good. Further, the TSX’s conduct implicitly evinces agreement with the view that it cannot be left to the capital markets to weed out improper listings. I say this because the TSX’s effort to clean up the Wild West image of the VSE consisted almost entirely in refusing to list the dogs run by the rogues that the brokerage community kept bringing to market and which the capital markets gobbled up. If the capital markets were as bright as you say they are, there would have been no reason for the TSX to refuse some of the listings sponsored by the brokerage community, and the VSE would never have gotten its Wild West image. Indeed, I’ve been told by listings officers that one of the considerations in deciding whether to list an issuer is the impact such listing would have on the TSX “brand”.

   Finally, I disagree with your disagreement because yours is founded on a category mistake: the capital market is incapable of intelligence, as it’s an abstraction, not a person. (I appreciate you are speaking in short-hand, but occasionally doing so gives rise to substantive problems, and this, in my view, is one of them.) It’s a collection of individuals, many of whom are gullible and unsophisticated. Public policy is intended, even if it often fails, to protect those individuals, not for the sake of those individuals but for the sake of the “public”, because the widely accepted assumption is that the public will benefit from the enhanced confidence in the capital markets such protection offers; and the capital markets, it should be remembered but often seems to be forgotten, exist not for their own sake but for the sake of the public.

2. jiHymas says:

   February 17, 2011 at 2:16 pm

   Indeed, I’ve been told by listings officers that one of the considerations in deciding whether to list an issuer is the impact such listing would have on the TSX “brand”.

   This represents part of my problem with the situation. Burnishing the brand is a business decision, not a regulatory one.

   If the TMX wants to pick and choose which issues it lists – fine! Let them! There’s no difference between that decision and Niemen Marcus refusing to sell Chinese Ikea knock-offs. But that should be explicitly a business decision, with no regulatory authority to hide behind. And the decision should not be forcibly imposed on other marketplaces.

   I say this because the TSX’s effort to clean up the Wild West image of the VSE consisted almost entirely in refusing to list the dogs run by the rogues that the brokerage community kept bringing to market and which the capital markets gobbled up
   Rogues who made a living selling moose pasture out of a bucket shop? Or rogues who didn’t go to the right school or know the right people? And how can one tell from the outside?

   Public policy is intended, even if it often fails, to protect those individuals, not for the sake of those individuals but for the sake of the “public”, because the widely accepted assumption is that the public will benefit from the enhanced confidence in the capital markets such protection offers; and the capital markets, it should be remembered but often seems to be forgotten, exist not for their own sake but for the sake of the public.

   I certainly take your point in theory, not so much in practice. The promotion of trade is a legitimate government function and it can be argued that minimum standards for listing are analagous to standards for weights and measures (which, as I’ve always considered fascinating, were specified in Magna Charta).

   The philosophical problem I have is that the listing requirements are “permission to” rather than the “prohibition from” that I am more comfortable with. By all means, let’s charge somebody with fraud if he has committed fraud; let’s even prohibit recidivists from acting as promoters. But lets do that with an open trial and the judiciary, not behind closed doors in the Club.

3. Drew says:

   February 18, 2011 at 10:26 am

   I agree with you on all counts, though on the issue of “charge me or let me in”, I’d like to point out that securities law is a category of administrative law, and is therefore unlike criminal law. Roguishness is very much like obscenity: we know the practitioners when we see them, but we can’t necessarily define precisely what it is that we’re seeing, nor can we prove beyond a reasonable doubt that the object of our assessment is guilty of what we suspect them of – we just instinctively know that we should run screaming in the other direction. Faced with this sight, the criminal law is likely to acquit; administrative law is likely to find guilt. Philosophically, this is messy. Practically, it seems to be the best we can do.

   The administrative law function that is performed by securities regulators works where its practitioners are intelligent, possessed of good judgement and fair-minded. The problem, which I think you’ve put your finger on, is that when you mix the profit motive (of a stock exchange) into the adjudicative process you taint it irredeemably. You don’t really even have a fighting chance of getting it right. That, in my view, is why the TSX should be expunged of it’s regulatory role. It’s also why the character of it’s owners is relevant.

4. February 23, 2011 « PrefBlog says:

   February 23, 2011 at 11:37 pm

   […] pre-tax interest-equivalent spread is now 235bp, a significant increase from the 225bp reported on February 16. It will be remembered that comparability of these levels over the long term has been compromised […]