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At a time when most Canadian brokerages have gotten bigger through mergers with U.S. investment houses and local banking giants, Yorkton Securities Inc. has embraced the idea of staying small. CEO Scott Paterson, 36, has fiercely maintained Yorkton's independence while emerging as the main proponent of small Canadian technology ventures.
Now, Paterson is putting his philosophy to the acid test. As the new chairman of the diminutive Canadian Venture Exchange (CDNX), Paterson will champion a junior stock market he has used to nurture numerous fledgling tech enterprises. CDNX, the result of a merger between the Vancouver and Alberta Stock Exchanges, was launched last November. The exchange is designed to provide a place for small-fry companies to raise capital. It has 2,255 listings, but their average market cap is only about $6 million ($9 million Canadian).
Nonetheless, CDNX is already a hot performer: The index of CDNX companies is up about 75%, to nearly 3500, in seven months. Trading volume is double the combined volume of the two predecessor exchanges. Paterson deserves a lot of the credit. Mark Maybank, executive vice-president of technology-incubator itemus Inc. and a former Yorkton analyst, calls Paterson "an awesome chairman" for the new exchange. For a Q&A with Scott Paterson, see BW Online, 7/5/00, "'The Only True Micro-Cap Exchange in the World'"
FIERY COMPETITION.
Whether or not Paterson succeeds could be crucial to Canadian competitiveness. The country, known for the traditional conservatism of its investors, has always suffered from a lack of venture capital. The new exchange is aimed at remedying that. Paterson terms it an "incubator" that will give Canadian entrepreneurs the jump start they need to get young companies moving. That could be key to nurturing Canada's nascent Internet and other high-tech companies. "I'm convinced that the vast majority of Canadians do not appreciate how critically important CDNX is to the future of the country," says Paterson. "It's that big."
But competition will be fiery. The young exchange is already vying for liquidity with the well-established Toronto Stock Exchange (TSE) and will soon find itself up against Nasdaq and private trading systems, both of which are mapping moves into Canada. CDNX also has to shake the questionable reputations of the Vancouver and Alberta exchanges, which were noted for loose regulation and lax reporting requirements for listed companies. Several analysts say one or both of the old exchanges were essentially blacklisted by some institutional investors and dealers.
The raspy-voiced Paterson has a reputation as a maverick in Toronto's financial community and a trailblazer in the technology sector, but he comes with some baggage, too. In recent months, he and employees of his firm have been heavily criticized by some members of the financial press and a few rival brokers for "pro-trading," the practice of playing multiple roles in corporate financings -- investor, adviser, and underwriter -- for certain companies Yorkton covers in its research. Others point out, however, that the practice is legal and often necessary to get some quality startup concepts moving.
GOOD MOVES.
With no scandals so far and tougher regulations than its predecessors, CDNX is already making some progress in gaining investors' confidence. "At our company, we did not consider [investing in] Alberta exchange listed companies," says Andrew McCreath, portfolio manager for Synergy Asset Management Inc. "We are more willing to look at a CDNX listed company."
Still, CDNX will have to avoid saddling cash-strapped startups with too much bureaucracy. "These are junior firms, and you don't want to overwhelm them with a regulatory and filing burden that's out of proportion to the size of the businesses involved," says Paul Bradley, software analyst for Canaccord Capital Corp.
Paterson has made some good moves so far. Analysts attribute much of the new market's improved liquidity to its move away from being dominated by mining and other resource companies. "It has made a shift consciously to be a junior exchange that deliberately links up with young technology companies," says Jim Tobin, president and CEO of itemus.
Indeed, technology companies were only 13% of listed CDNX companies as of May 31. But in the first five months of 2000, they accounted for 29% of the total trading volume and a huge 59% of the value of the shares traded. "The Canadian economy is rapidly moving towards a knowledge-based economy, and so we will see a greater and greater percentage of the listings on the CDNX being technology-type companies," says Paterson.
EMBRACING THE DREAM.
The exchange soon will face a stiff challenge for investor dollars, however. The Quebec government is fast-tracking legislation that should allow Nasdaq to trade in Montreal by October. Nasdaq Canada promises to be a listing magnet for Canadian tech outfits that might currently build local investment before jumping to the U.S.
"From Canada's perspective, we should never fight the reality that technology entrepreneurs want to be listed on Nasdaq and have a U.S. following," says Paterson. "That's the dream of every technology entrepreneur, and we should accept it and embrace it." Canadian regulators also are clearing away regulatory hurdles for alternative trading systems so they too can trade in Canada.
Paterson argues that the new exchange can prosper even in the face of such competition. He wants the CDNX to act as a "feeder" that will nurture small Canadian companies until they're strong enough to list on Nasdaq Canada, the TSE, electronic exchanges, or elsewhere. Paterson says some companies are already planning to list shares on CDNX to build a following among Canadian investors, then list later on Nasdaq. One example: Engineering.com Inc., an applications-services provider that's a subsidiary of Rand Technology Corp. "That company we think is going to be very exciting," Paterson says
PROMISING NICHE.
John Wall, president of Nasdaq International, lends some credence to the idea that CDNX can play this incubator role. He says Nasdaq Canada is mainly trying to lop off listings of big-cap companies on the TSE, which it sees as its main competitor. "Quite frankly, CDNX is really not in our sights," Wall says. "Their listing standards are far below ours -- and the companies [listed on CDNX] are much too small for Nasdaq."
So for now, CDNX is probably filling a niche in which it can prosper. "We need in this country the ability to finance companies in $5 million rounds," Paterson stresses. "That's not going to happen on some global stock exchange or an alliance [by the TSE] with the New York Stock Exchange or even on Nasdaq Canada." With that in mind, Paterson's "small is beautiful" credo may just be the key to CDNX's survival.
By Hugh Filman in Toronto
EDITED BY THANE PETERSON
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Copyright 2000, Bloomberg L.P.
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