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September 30, 2001

A Canadian Tonic Helps the U.S. Flow New Rules Could Send Orders North

By Sanford Wexler

Also in this article

  • A Canadian Tonic Helps the U.S. Flow New Rules Could Send Orders North
  • Page 2

The Canadian stock market, dwarfed by its U.S. neighbor, is looking south for more business.

It is called reciprocal business. And it has been triggered by an increase in the percentage of foreign stocks that Canadian institutional investors can own.

While the arrangement should clearly benefit dealers in the U.S., the Canadians seem more excited. That's because it further opens, however slightly and indirectly, the much larger U.S. market to them.

"The more retail trades that our firm has in U.S. order flow the more I can send to my friends across the border in the U.S.," said James Duncan, vice president of international trading at Canaccord Capital in Toronto. "And I can pick and choose who I send it to in hopes of getting reciprocal order flow. As a reciprocal trading partner, the more flow that I can show across the border the more flow I hope to get back."

While there is no guarantee of an uptick in order flow - north or south - some trading pros say the new rules, as well as more cross-border trading in recent years, are an encouraging sign. Reciprocal business is one hope for Canadian trading desks.

"Canadian mutual and pension funds and individuals are going to be able to own more and more foreign stocks," said Duncan, who's also chairman of the Security Traders Association's international committee. "The trend in the fund industry here is towards holding those stocks listed in the U.S."

This year the percentage of foreign equities that can be owned by Canadian mutual funds, especially Registered Retirement Savings Plans (RRSPs) - Canada's version of the U.S. 401(k) - has jumped from 25 percent to 30 percent.

At the moment, Canadian mutual funds hold about U.S. $68.9 billion in foreign equities. About U.S. $15.3 billion of that is accounted for by stocks listed in the U.S. markets.

All told, Canadian investors have invested about U.S. $275 billion in equities. That's 1.5 percent of the roughly U.S. $18 trillion valuation of all U.S.-listed stocks. The total assets of Canadian mutual funds are around U.S. $210 billion, according to the Investment Funds Institute of Canada. Twenty years ago, in contrast, the value of mutual fund assets under management in Canada was only a tiny fraction of today's total, about U.S. $1.75 billion.

Today, nearly half of all Canadian adults are invested in the stock market, according to the Toronto Stock Exchange. The exchange notes that almost half of all Canadian adults, or 8.9 million people, own shares directly or through mutual funds - twice as many as a decade ago.

Meanwhile, encouraged by the stock market boom of recent years, many of the top U.S. and European securities dealers extended their foothold in Canada. These include Merrill Lynch Canada, Charles Schwab Canada, Deutsche Bank Securities, Salomon Smith Barney Canada, J.P. Morgan Securities Canada, Goldman Sachs Canada, UBS Bunting Warburg, Lazard Canada and Credit Suisse First Boston.