Regulators can get Canadian companies back on track in 2016

Here’s a well-written Opinion by Larry Reaugh and Daniel McGroarty that identifies a huge problem that for some reason the regulators have been unwilling to fix.  If they continue to refuse to fix it, the whole works of them should be terminated and replaced with people who understand the market.

“How can we staunch the bleeding and help Canadian resource companies?

Restore the up tick rule. Would that really help? Yes, and we don’ t have to speculate.

It’s official. The last trading day is done, and 2015 is in the books. The financial headlines read like an epitaph: 2015 is the year the Canadian market dropped like a stone, posting the world’s third-worst decline — eclipsed only by Singapore (read: undone by the China bubble) and Greece, Europe’s economic basket case.

NATHAN DENETTE/THE CANADIAN PRESSCanada was home to the world’s third-worst market decline in 2015, behind only Singapore and Greece.

Canada down there with Greece as one of the world’s worst investment markets makes for good copy. Google it — you’ll find it fast becoming a staple of financial stories.

With all that Canada has going for it, how is that possible?

Start with what everyone knows. Everyone knows that Canada’s economy is strongly slanted toward resource extraction, and resource prices are down across the board. True enough, but why when copper is down 52 per cent from 2011 to today, should mining companies be down 90 to 99 per cent over the same period — literally trading for pennies on the dollar? Over at the London Metal Exchange, the copper stockpile is 45 per cent smaller. In a rational world, smaller stockpiles result in a rising price. But not for resource stocks on the Canadian exchange.

If you’re looking for a reason, try the end of the uptick-trading rule — a bedrock concept that helped lead the U.S. markets out of the Great Depression 80 years ago, and pulled Canada’s financial market up right alongside. The uptick rule eliminated the ability for predatory short traders to influence the downward pressure in a falling market. The rule simply changed the short trade from a manipulation to a bet on which direction the shares were headed. You had to borrow the shares you did not own before selling them, and could only do so on an uptick.

For reasons never fully explained to the public, regulators reacted to the aftermath of the 2008-09 financial meltdown by scrapping the uptick rule.

The change ushered in a kind of wild-west trading that no Canadian under 80 years old has seen in his or her lifetime. Here’s how it works. Speculators now don’t have to own a share of stock to sell short — they’re free to hit the bids with non-existent shares until the price crumbles. Eventually long-term shareholders feel pressed to sell, allowing the traders to cover their short positions — pocketing investor money that could have gone to financing the company. And the company goes on life-support without any regard to market fundamentals, or global demand for the resource in question.

The damage to the Canadian economy is considerable. Around 100,000 jobs have been lost directly and indirectly from the demise of the Venture Exchange — and who knows how many from the TSX itself.

How can we staunch the bleeding and help Canadian resource companies, not to mention the oil and gas and pharmaceuticals sectors, return to financial health? Restore the uptick rule.

Would that really help? Yes, and we don’t have to speculate. Look at the U.S., for instance. The uptick rule was ditched in 2007, fuelling the 2008-09 market implosion. Almost immediately, there was a huge clamour in the U.S. to reinstate the uptick. In February 2010, the SEC reinstated a partial uptick rule. The Dow has gone straight up since then — a gain of over 7,500 points.

Canada, for its part, moved in the opposite direction, starting down the regulatory road to repeal the uptick rule in early 2011.

Today, Canada’s equity market is scraping along the bottom. Look out Greece, we’re coming for you!

Why aren’t more people blowing the whistle on the disastrous impact of a financial world without uptick? Because it’s a great game for the traders, who can put their money on the table — and their thumb on the scales. Don’t expect them to enlighten the Canadian public about what’s going on.

The plain fact is that Canada shouldn’t be in the situation it’s in. The world population is growing, heading for 10 billion in 2050. Hundreds of millions of people are moving in the next generation up from subsistence living, and into some semblance of middle-class life — with all of the creature comforts that implies. The world needs more resources, and Canada is blessed to have them.

Let’s put the uptick rule back in place, to let the markets finance Canadian resource companies, to meet global needs — and lift Canada and her people to new levels of prosperity.”

 

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