NASDAQ in Montreal. So?

The announcement in April that NASDAQ was coming to Montreal created a huge stir. Cheers from Quebec contrasted sharply with the outcry in Toronto. The news was greeted with shouts of "scandal," "sellout" and the inevitable "back-stab." These extreme reactions are simply a manifestation of the pendulum effect in the Canadian Stock Exchange restructuring. Someone has to be the winner. But why such contention over symbols of capitalism that belong to the past?

The day after the Quebec government made the announcement, Ernie Eves, Ontario's finance minister, made a revealing statement in The Globe and Mail in an attempt to play down the news. For him, Quebec's announcement was mainly a political show. He also believes that, one day, stock exchanges will disappear and everything will move through the Internet. Suddenly, it began to dawn on Bay Street that the Toronto Stock Exchange might be the big loser in the specialization of Canada's exchanges.

Shock waves also swept through Quebec where, before the "NASDAQ victory," most observers had criticized the government, accusing Finance Minister Bernard Landry of surrendering the stock trade to Toronto without a fight. For them, even if the Montreal Stock Exchange now only accounted for a mere 10% of the Canadian stock market, the exchange remained a powerful symbol, and any self-respecting economy or country had to have one of its own. In their eyes, the restructuring project, as defined, had certainly established Toronto as Canada's trading centre and financial hub.

It is important to understand that the restructuring had undermined the Quebec government's efforts to restore Montreal's financial status. With its international financial centres program and its Caisse de depot et placement intensifying its efforts to build up a critical mass in portfolio and investment fund management in Montreal, the Quebec government was set on reinstating Montreal as a financial centre.

That's when the NASDAQ announcement turned the debate on its head. By choosing Montreal, the world's most highly capitalized exchange has put the city back on the world map. While it is, in fact, nothing more than an antenna - a counter that will change little for investors and issuers who already have NASDAQ access via the US - it is a powerful symbol. And the latent threat this virtual stock exchange poses for Bay Street's conventional trading floor will surface once it starts quoting Canadian securities currently listed in Toronto.

So Bay Street is forced to acknowledge that the TSE, by becoming the only exchange in Canada trading in stocks of moderately and highly capitalized enterprises, bet on the past: that, sooner or later, it will be marginalized and fall under Wall Street's control. Any rebalancing will be that much more difficult, since, unless it demutualizes, it will remain the preserve of dealers.

Though Montreal momentarily tasted sweet revenge, NASDAQ's coming is more a Band-Aid than a cure. Despite its international deployment, NASDAQ, though one of the most electronically advanced exchanges, remains conventional: it's owned by the dealers who use it.

In NASDAQ's shadow, new-generation e-exchanges are emerging. These high-tech platforms sometimes offer direct-order book access that escapes dealers' control and promises users - investors and issuers - an efficient, fluid market; quick, confidential, low-cost trading; and the possibility of off hour trading. The systems rely on electronic communication networks (ECNs), which are user-owned.

This is just what large institutional investors (such as the Ontario Teachers' Pension Plan, the Ontario Municipal Employees Retirement System and Caisse de depot et placement) are looking for. Since these account for 75% of the stock market, what they want is important.

Last spring, of nine new ECNs that had already cornered 30% of NASDAQ volume, four were in the process of merging. One of them, Archipelago, even accelerated the development of its intermarket links by acquiring the Pacific Stock Exchange.

The advent of ECNs, which are being called the electronic exchanges of the future, has been recognized by securities regulators in both Canada and the US. The Commission des valeurs mobilieres du Quebec (CVMQ), for its part, has said these systems "offer interesting possibilities not available on the conventional markets." For example, "they can operate an order book for a continuous auction market, a dealer market or an anonymous match based on the price determined by the principal market. ECNs make it possible to handle a larger volume of trades, and to offer greater transparency of information and better access to markets." The CVMQ concludes, based on US experience, that "efficiency gains obtained can reduce general operating costs."

We might well fear for the TSE and cheer the establishment of NASDAQ Canada in Montreal (or vice versa), but all eyes should be on ECNs for a glimpse of the future.

[Author Affiliation]

Gerard Berube is editor of the Economie et finance section of Le Devoir in Montreal.