The last time you purchased or sold shares on the stock market, did you think of the price of milk? Probably not, unless you were buying shares in a dairy company.
On Sunday, while wandering around Queen Street West in Toronto, I went into a boutique food store and bought a farm-fresh bottle of premium chocolate milk. It's a luxurious drink, in a luxurious glass bottle, with a luxurious price tag of $7 a bottle. A few hours later, I went into another boutique food store, and there was the same bottle of chocolate milk, priced at $5 a bottle.
This happens every day to every one of us. It doesn't matter if you are buying chocolate milk, a hockey stick, or an automobile – prices for the same thing at the same time vary. Buying foreign currency for that trip to Italy? Same thing. Buying a bond? Same thing again.
With one exception: the stock market.
Uniquely, the stock market provides a best price guarantee. If that bottle of artisan chocolate milk was trading on the stock exchange, two things would happen. First, the professional traders would arbitrage the price difference between those two identical bottles of milk, down to one or two pennies in the case of the most heavily traded stocks. That $7 bottle now becomes just pennies more than the $5 bottle. And second, the law would require your broker to buy it for you at the cheapest price available, being $5. In fact, your broker is not allowed to buy it for you at $5.01, let alone $7.
How fast would this price-resetting happen? In seconds, likely milliseconds. Why? It’s because of all that complication you are hearing about. At the intersection of the traditional, electronic and high-frequency traders sits the world’s most efficient market.
Imagine if you had this experience in the rest of your life. If, on Saturday morning you didn’t have to comparison shop for those particular skates, or that certain chainsaw or a specific car. If, with a single click of the mouse, you could get the best available price for any of those things. Moreover, imagine knowing that, if the prices for any of those things started to diverge, traders all over the world would bring them back into line within milliseconds. It’s just a dream if you are buying car tires. It’s a reality if you are buying shares in Canadian Tire.
Just because the stock market is the best marketplace, however, doesn’t mean we can’t make it even better. In fact, we need to continue to make it better, now more so than ever.
The stock market has undergone more change in the past decade than in the previous century. Through a combination of regulatory change, the opening of the industry to competition (multiple markets all competing to trade the same stocks) and the explosion of electronic trading, today’s marketplace is complicated. It is challenging traditional participants, from investors to traders to the legacy stock exchanges, and it is giving rise to vigorous debate around public policy issues.
Canada is doing a very good job at dealing with these public policy issues. We have stock market fragmentation, but in a less complicated way than the United States. We have high-frequency trading, but in a better balance than the United States. We have dark trading, but not to a level that is undermining the visible pricing of individual stocks, as has happened in the United States. Over all, we have a long-standing commitment in Canada to the importance of visible stock markets that make sure the price you see is the fairest price available. And our regulators have set an enviable standard, internationally recognized, for using evidence and research – not headlines – to develop and implement policy.
In the fast changing landscape, enforcement of the rules is more critical than ever. We need to make sure our regulators have the tools and capabilities to keep up with technological change. Most of the market principles we value are timeless, for example, the commitment to preventing market manipulation. We need to keep applying those values, more vigorously than ever, to the more complicated landscape.
The Canadian stock market is fair. Rules are being enforced against behaviour that violates our marketplace rules and values. Policies and market enhancements will continue to be developed that promote the fairest and most efficient markets. Issues around high-frequency trading, like other marketplace developments, will be resolved, in a balanced way, based on research and analysis.
No, the stock market is not perfect. But if the best available price at any point in time, whether you are buying or selling something, is what you are looking for, then the stock market is the fairest and best marketplace there is. And the Canadian stock market is among the best of the best.
Kevan Cowan is the president, TSX Markets and Group Head of Equities, TMX Group.
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