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December 1, 2000

Canada's Liquidity Challenge

By Sanford Wexler

Worried about liquidity in the U.S.? Then talk to Stephen Craig, head trader at J. Zechner Associates, a buy-side firm in Toronto, Canada.

Finding liquidity on the Toronto Stock Exchange (TSE), Craig says, is a lot more challenging than on Nasdaq.

"When I talk to a Nasdaq dealer [in the U.S.] there is almost never a liquidity problem," Craig said. "We are trading the Nasdaq 100 stocks. And that's the reason. But, quite often, as we trade Canadian stocks [on the TSE] there are liquidity issues."

Craig said he can "easily sell" 200,000 shares of Microsoft on the phone via a Nasdaq dealer, but he can't generally sell 200,000 shares of Northern Telecom as smoothly on the phone via the TSE. (Northern Telecom is the biggest company on the TSE).

Volume on the TSE is much thinner, compared to the U.S. markets, especially the NYSE and Nasdaq. In 1999, the TSE's total yearly volume was only 29 billion shares compared with daily volume of about 1.6 billion shares on Nasdaq.

Craig was something of an exception among his friends as he was growing up in Toronto. A generation ago, the stock market was not on the minds of most young people in North America. Craig was different.

"I was always fascinated with stocks and bonds," he said. "I invested from the time I was 19-years-old."

Craig heads up a two-person desk that has some $3.8 billion Canadian ($2.8 billion U.S.) under management. The desk performs about 40 block trades each day. John Zechner, the founder and president of the firm, who is also the head portfolio manager, sits about 25 feet away from Craig. The firm's other two portfolio managers are also situated near the trading desk.

Zechner's clients comprise several Canadian pension accounts as well as several high-net worth individuals. The firm also manages four mutual funds, including C.I. Canadian Growth Fund, C.I. Canadian Income Fund, C.I. Canadian Balanced Fund, and the C.I. Canadian Income Fund.

Some $2 billion U.S. of its assets are allocated to equities, including 90 percent Canadian stocks. The remaining amount is invested in non Canadian stocks, including U.S. listed and Nasdaq issues.

Craig graduated in 1983 from the University of Western Ontario in London, Ontario with a degree in finance. His schooling did not end after he earned his college diploma.

After graduation, he entered an intensive training program for young equity traders at the Toronto-based sell-side firm, Wood Gundy (now part of CIBC World Markets). After he completed the two-year training program he went on to become a full-fledged trader at Gundy.

Craig's next stop in his trading career was at the firm of Walwyn

Stodgell in Toronto, where he co-headed the institutional trading desk for three years. He then joined First Boston Canada, also in Toronto. In 1993, he switched over to the buyside and joined J. Zechner Associates.

Married and the father of three young children - two boys, ages ten and 8, and a girl, 7 - Craig enjoys spending his free time working out at the gym and watching his children participate in Canada's favorite pastime, ice hockey. "I love watching my kids play sports," he said proudly.

Zechner does not use ECNs, Craig says, for executing its orders. "It's such an illiquid market up here," he said. "It's very difficult to trade on ECNs."

The Canadian buy-side trader's challenge in finding liquidity in his domestic market is an eye opener for his U.S. Stateside counterparts.

Although the TSE accounts for approximately 95 percent of all equity trading in Canada, it is a far cry from the Big Board and Nasdaq. "The depth of the market is not here," Craig said.

Craig explained that unlike the Nasdaq dealer market that has multiple market makers in various stocks, the TSE has only a handful for each issue.

As a Canadian buy-side firm that buys and sells U.S. stocks, primarily Nasdaq issues, Craig said getting superior executions from U.S. broker dealers is often a tremendous hurdle. Best execution' is always on his mind when he's dialing up his U.S. broker dealers.

Craig foresees decimalization in the U.S. making it easier to trade at better prices. "It will increase competition," he said. "And that will be good for the buyside."