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Company buybacks may slow as TMX cracks down

File photo of an employee seen at the Toronto Stock Exchange.

Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail

Companies looking to buy back stock are going to have to take it a little slower after market regulators cracked down on a practise that companies had been using to purchase large blocks of stock.

On Friday, TSX owner TMX Group Inc. published a "clarification" that banned the practise of bundling orders into one big block to sell to a company that wants to buy back stock. Reaction from many traders has been critical, as they argue that the rule disadvantages companies doing buybacks.

"This change will be very unpopular with institutional investors, corporate issuers and their brokers," Graham MacKenzie, an executive director in the trading department at CIBC, said in a note to clients.

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Companies buying back stock under a normal course issuer bid (NCIB) program are limited to buying 25 per cent of the average daily volume each day, and a block exemption allows the purchase on top of that of one block each week. Some traders, looking to ensure that once-per-week block is as big as possible, had been creating larger blocks by bundling together many sell orders. This also enables more sell orders to get filled.

TMX says that such bundling is against the spirit of the block exemption, which is supposed to be only for a "naturally occuring" block of stock. The upshot for companies doing buybacks is they may not be able to purchase as much stock as fast or as cheaply because the blocks they buy will be smaller.

"Many issuers but especially those with an illiquid stock will face challenges meeting their NCIB objectives, notwithstanding the availability of willing sellers in the marketplace," Mr. MacKenzie wrote.

Some traders believe that TMX wants to eliminate such bundles because it cuts down on what the exchange gets paid -- something TMX disputes. The exchange earns a fee when trades take place on the TSX, but it doesn't when trades are done as blocks off the exchange.

By limiting the number of shares allowed into blocks for buybacks, the company could force more trading onto its main order book where the exchange gets paid a fee when trades take place, said Doug Clark, managing director of research at trading firm ITG Canada.

"Given how much issuers pay in listing fees it is disappointing to see the TMX not treat them better," said Mr. Clark.

TMX Group says the move has nothing to do with generating fees, but to ensure that traders were hewing to the intent of the rule.

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"We recently issued a staff notice to provide clarification because it had come to our attention that block trading was occurring that was not consistent with the spirit of the rule," said Carolyn Quick, a spokeswoman for the company. "In fact, dealers that were complying with the rule asked us to make the proper interpretation of the rule clearer to all."

She said that the exchange operator has been discussing the plan with traders for weeks, and also with the Ontario Securities Commission, which is "supportive" of the TMX position.

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