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Episode 5: Canada's Exchanges | Canadian Investing · How Canadian Markets Work

• 0:00
  Imagine you're buying a used car. You wouldn't
• 0:03
  pay the exact same price or, you know, have the
• 0:05
  exact same peace of mind if you were buying it
• 0:08
  from a massive certified dealership versus buying
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  it from some guy in a dark alley. Right, definitely
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  not. I mean, the underlying car might look totally
• 0:15
  identical, but the actual lot it's parked on
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  tells you an enormous amount about the background
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  checks, the warranties and, you know, all the
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  hidden risks. Exactly. It's context. Yeah, but
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  every single day... millions of investors buy
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  stocks without even bothering to check which
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  lot the company is parked in. You look at two
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  Canadian companies. They're roughly the same
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  size and the same sector, pitching a similar
• 0:37
  growth story. One trades on the TSX, the other
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  on the CSE. And for most people, those letters
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  are just background noise. They don't even register.
• 0:46
  You're hitting on a huge misconception there.
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  I mean, people treat the stock exchange like
• 0:51
  a choice of banking partner. Right, like it's
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  just an administrative thing. Yeah, as if finding
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  out one company uses a national bank and the
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  other uses a local credit union shouldn't matter
• 1:01
  to you, the investor, at all. But it matters
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  immensely. Totally. So we are going to map out
• 1:07
  the mechanics of Canadian stock exchanges for
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  you today, because the venue a company chooses
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  or the venue it is forced to settle for is actually
• 1:16
  a vital piece of intelligence. OK, let's unpack
• 1:19
  this, because the idea from our source material
• 1:21
  that I can learn something fundamental about
• 1:23
  a company's risk profile literally like a four
• 1:26
  second shortcut just by glancing at the three
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  or four letters next to its ticker symbol on
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  a quote page. That is just fascinating to me.
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  It's powerful, right? It's all about understanding
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  that a stock exchange is essentially a static
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  filter. A filter. Yeah. Right. Yeah. So before
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  you can deploy that four second shortcut, you
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  really need to understand the main arenas where
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  Canadian public companies live and, you know,
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  the invisible hurdles they have to clear just
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  to get their foot in the door. So let's start
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  at the top of the food chain then. The big one,
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  the Toronto Stock Exchange or the TSX. The Senior
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  Exchange. Right. It's the home turf for the heavyweights.
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  We're talking the national banks, major railways,
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  massive pipeline operators, giant mining conglomerates.
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  I imagine getting listed there is not just a
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  matter of like filling out a web form and paying
• 2:12
  a fee. Oh, far from it. To get under the Senior
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  Exchange, a company is subjected to intense financial
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  scrutiny. I mean, very intense. Like what kind
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  of scrutiny? Well, we are talking about strict
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  audited requirements regarding minimum earnings
• 2:26
  over a trailing period or massive minimum asset
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  valuations. They have to prove they have a substantial
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  public float. Meaning millions of shares actually
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  circulating, right? Like available for the public
• 2:38
  to trade, preventing price manipulation. Exactly.
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  Yeah. They need hundreds of distinct individual
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  shareholders and they have to prove they have
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  sufficient working capital to, you know, just
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  keep the lights on for the foreseeable future.
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  It honestly reminds me of trying to get into
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  a highly prestigious university. That's a good
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  way to look at it. You know, you can't just walk
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  through the iron gates. You have to show years
• 3:00
  of perfect grades, excellent test scores, and
• 3:02
  a track record of actual undeniable performance.
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  The listing requirements themselves act as a
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  very aggressive gatekeeper. That university analogy
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  captures the dynamic perfectly. The requirements
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  are a very high bar. Yeah. So the mere fact that
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  a company has cleared that bar is highly valuable
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  information for you. It signals that a rigorous
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  baseline level of financial due diligence has
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  already been completed by the exchange itself
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  Okay, but then we have the sibling to the TSX
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  the junior exchange the TSX venture or TSX V
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  right the venture It's owned by the exact same
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  parent company, but it clearly serves a completely
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  different purpose This arena is built for smaller
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  much earlier stage companies heavily skewed toward
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  mining exploration and small tech startups very
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  heavily skewed. Yes And the bar to get in here
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  seems, well, a lot lower. Substantially lower.
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  And this is a crucial distinction for your portfolio.
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  A company trading on the TSX Venture Exchange
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  might have absolutely zero earnings. Zero. Not
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  low earnings, zero. Its entire business might
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  consist of nothing more than a freshly staked
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  mineral claim out in the wilderness, a geologist,
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  and a highly optimistic plan on a piece of paper.
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  Wait, I have to push back on this. Go ahead.
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  If a company is sitting on the venture exchange
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  with literally zero earnings, isn't that automatically
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  a blaring red flag for you as an investor? I
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  mean, I love the idea of an incubator program
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  based on a pitch, but buying stock in a company
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  that just has a geologist in a dream sounds incredibly
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  reckless. It is exceptionally risky, I'll give
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  you that, but it's not automatically a red flag.
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  We have to remember the fundamental purpose of
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  public markets in the first place. Which is capital
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  formation, right? Exactly. Early stage companies
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  need capital far more desperately than mature
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  cash flowing enterprises do. They need millions
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  of dollars just to drill holes in the ground
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  to test that geological hypothesis or to build
• 4:58
  the beta version of that software prototype.
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  Right. They can't fund it themselves yet. Right.
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  So facilitating that kind of early stage high
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  risk capital formation is the entire point of
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  this tier of the market. So it's a feature of
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  the system, not a bug. Yes. The listing itself.
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  The fact that it clearly says TSX V and not TSX
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  on your quote page is the filter actively communicating
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  with you. OK, that makes sense. Clearing the
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  venture bar tells you exactly how much homework
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  has been done, which is to say significantly
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  less than on the senior board. The market is
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  explicitly telling you this is speculative risk.
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  Adjust your expectations and your position sizing
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  accordingly. OK, so we have the senior university
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  and the junior incubator. But what happens if
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  a company can't or maybe deliberately won't meet
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  the requirements of either the TSX or the venture
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  exchange? Well, that introduces us to the alternative
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  tier of the market, which is where the landscape
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  gets incredibly dynamic. Enter the Canadian Securities
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  Exchange, the CSE. Oh, the CSE. It's definitely
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  made a name for itself over the last decade.
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  It positioned itself as an independent, lower
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  cost, lighter requirement alternative, right?
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  Very much so. It really blew up during the massive
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  wave of cannabis legalization and then later
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  with the initial boom of crypto adjacent companies.
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  It stepped into a massive void. Honestly, the
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  listing rules of the traditional senior exchanges
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  were rigid. They simply couldn't or legally wouldn't
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  accommodate those highly experimental, newly
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  legalized or unregulated types of businesses
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  at the time. Right. They were too new. Exactly.
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  The CSE offered a pragmatic home for them. So
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  what does this all mean then? Is the CSE just
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  the Wild West where the rules don't apply, anything
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  goes, and investors are just throwing darts in
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  the dark? What's fascinating here is that while
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  the immediate assumption is often highly negative,
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  you know, painting the entire exchange as a wasteland,
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  that's actually a mistake. Really? Yeah. Yes,
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  it sits at the wilder end of the regulatory spectrum
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  compared to the TSX. But you cannot simply write
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  off every CSE company. There are perfectly sound,
• 7:01
  highly lucrative, legitimate businesses listed
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  there. Just because they actively chose the lighter
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  requirements? Precisely for that reason. Some
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  companies end up there because they fail to meet
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  TSX or venture standards, yes. But often, a very
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  competent management team makes a calculated
• 7:17
  strategic decision. Oh, to save money. Exactly.
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  They choose the CSE purely to avoid the exorbitant
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  listing fees, the crushing administrative burden,
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  and just the sheer structural complexity of maintaining
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  a senior listing. Got it. So seeing a CSE listing
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  doesn't mean walk away immediately. It just means
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  look much, much harder. Yes, exactly. It's a
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  yellow flag, not a guilty verdict. Now, speaking
• 7:41
  of where things trade, there's a concept regarding
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  market plumbing from our deep dive today that
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  completely blew my mind. Oh, the trading venues.
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  Yeah. When I look at the stock on the TSX, I
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  just assume all the buying and selling is literally
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  happening on the servers at the Toronto Stock
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  Exchange. But that's not true anymore, is it?
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  It hasn't been true for a long time. Today, a
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  listing venue and the place where trading actually
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  happens have quietly decoupled. They are two
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  entirely different concepts. Right. So like Cibo
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  Canada, which used to be known as the NEO exchange?
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  Right. Exactly. A company might have its primary
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  listing, its official badge of approval, so to
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  speak, from the TSX. But when you hit buy in
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  your brokerage account, The actual matching of
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  your trade with a seller might get routed to
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  Cibo Canada servers or Omega or any number of
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  alternative trading systems. Just because they're
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  faster. Yeah. Simply because they offered a microsecond
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  faster execution or a fraction of a cent better
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  price. That is wild. So the stock is listed in
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  one place, but the shitters are being actively
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  swapped across a web of different electronic
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  marketplaces simultaneously. Exactly. The plumbing
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  is highly fragmented, but for your four -second
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  shortcut, you don't care where the trade executes.
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  You only care about the primary listing venue.
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  Where did the company clear the bar? Right. That's
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  the intelligence. Exactly. And to round out that
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  map of venues, we also have to touch on the Montreal
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  Exchange, which sits entirely outside this equity
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  conversation. Right. Because you aren't going
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  to the Montreal Exchange to buy shares of a bank
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  or a gold miner. It is Canada's dedicated derivatives
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  exchange. a completely different animal. Derivatives,
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  specifically options and futures, are contracts
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  based on the underlying stock. You aren't buying
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  a piece of the company. You're buying a contract.
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  Yes. A contract that gives you the right to buy
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  or sell that stock at a specific price at a future
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  date. It's about hedging risk or making leveraged
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  bets, not establishing ownership. So if you see
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  activity in Montreal, you are looking at the
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  mechanics of risk management, not standard stock
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  listings. OK, here's where it gets really interesting.
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  We've established these venues as static filters,
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  the senior board, the incubator, the alternative
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  Wild West. But companies don't just sit frozen
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  in amber. No, they don't. The most lucrative
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  and, frankly, the most dangerous information
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  for an investor comes from watching a company
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  physically move between these different exchanges
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  over time. The lifecycle and the direction of
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  travel. Now, let's map this out using a hypothetical
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  mining startup. We'll call them Northridge Minerals.
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  OK, let's play this out. Northridge starts completely
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  private. You've got two geologists, a patch of
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  dirt in northern Ontario, and a compelling theory.
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  At this stage, no stock exchange will touch them.
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  Not a chance. So they raise a few million bucks
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  in what's called the exempt market. And we should
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  clarify what the exempt market is. It is a space
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  where standard public securities rules do not
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  apply. It's specifically reserved for accredited
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  investors. Which means rich people. Basically,
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  yes. These are typically high net worth individuals
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  or institutions who in the eyes of regulators
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  possess the financial sophistication and frankly
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  the sheer wealth to afford losing their entire
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  investment without ending up destitute. But a
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  few million bucks from wealthy friends only go
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  so far. To bring in heavy drilling equipment
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  Northridge needs tens of millions. They still
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  cannot possibly meet the strict asset and revenue
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  requirements of the senior TSX. So they go public
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  on the junior incubator board, the TSX venture.
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  Right. And if you are an average retail investor
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  buying shares of Northridge on the venture exchange
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  at that exact moment, you must be radically honest
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  with yourself. About the risk. Exactly. You are
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  not buying a functioning cash flowing business.
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  You are buying a highly speculative geological
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  hypothesis. Statistically, the vast majority
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  of these exploration companies burn through their
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  cash, find nothing but barren rock, and quietly
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  fade away. That's grim. But let's say Northridge
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  defies the odds. Five years pass. They define
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  a massive gold deposit, secure major institutional
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  financing, build the physical mine, and start
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  pulling gold bars out of the ground. They've
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  made it. Right. They're generating massive sustained
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  revenue. Now they finally meet the strict financial
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  metrics of the senior TSX. So? They graduate.
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  And this graduation feels like more than just
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  updating the corporate letterhead. I like to
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  think of it like unlocking a hidden VIP level
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  in a video game that suddenly spawns all these
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  institutional whales who simply weren't allowed
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  to play with you before. That is the perfect
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  way to visualize it. Graduation fundamentally
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  changes the financial physics of the company
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  by changing who is legally permitted to own the
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  stock. Because of institutional rules. Yes. You
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  have massive pension funds and conservative mutual
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  funds with strict internal mandates that outright
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  prohibit them from touching any stock listed
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  on the venture exchange. It's deemed entirely
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  too volatile for their risk parameters. Right.
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  You also have enormous passive index funds that
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  are mechanically forced to buy stocks simply
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  because they are added to a major TSX index.
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  So the very second Northridge is officially uplisted
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  to the TSX, billions of dollars of institutional
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  capital are suddenly unlocked and permitted to
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  buy their shares. That is a massive structural
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  injection of new demand. It is the driving motivation
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  for management teams. Graduation is not vanity.
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  It is about accessing entirely new, vastly deeper
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  oceans of liquidity. But, you know, gravity exists
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  in the market. The direction of travel goes both
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  ways. Oh, man. Let's run the Northridge scenario
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  in reverse, then. The drill results are an absolute
• 13:21
  disaster. The deposit is microscopic. The money
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  completely runs out and the company aggressively
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  shrinks. A very common story. Yeah. Eventually
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  they fall below even the incredibly low bare
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  minimum requirements of the venture incubator.
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  What happens to my shares then? They get delisted.
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  And you need to understand the mechanics of this
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  failure. The company doesn't magically vaporize
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  overnight. It still exists as a legal entity
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  and the shares in your brokerage account are
• 13:50
  technically still yours. Okay. But they are stripped
• 13:53
  of their exchange status. They get banished to
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  a financial gray market trading over the counter
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  or OTC. And we really need to pause on how terrifying
• 14:01
  that actually is for a retail investor. It's
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  like being trapped in a financial ghost town.
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  Ghost town is the right phrase. When you are
• 14:08
  delisted to the OTC gray market, liquidity completely
• 14:12
  dries up. The corporate disclosure requirements
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  shrink to almost nothing and the bid ask spreads
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  become absolutely enormous. The bid ask spread
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  is the ultimate trap. Let's say you log into
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  your account. and you want to sell your delisted
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  shares. You might see someone asking a dollar
• 14:28
  for the stock. But the highest bid the most anyone
• 14:31
  is actually willing to pay you for it is 10 cents.
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  Wow. A 90 cent gap. That massive 90 cent chasm
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  exists because there is no centralized exchange
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  organizing the market and no volume to bridge
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  the gap. In many cases, you might not be able
• 14:47
  to find a single buyer at any price. You are
• 14:49
  entirely trapped in an illiquid dead asset. Which
• 14:53
  just proves why the direction of travel is the
• 14:55
  ultimate cheat code. Almost nobody bothers to
• 14:58
  look back and check if a stock was recently demoted
• 15:00
  from the TSX down to the venture. But that backward
• 15:03
  trajectory is a massive blaring siren warning
• 15:06
  you about the health of the underlying business.
• 15:09
  If we connect this to the bigger picture, graduation
• 15:11
  is a stamp of aggressive growth. Demotion is
• 15:14
  the market screaming at you to run. Okay, so
• 15:17
  if clearing these senior TSX rules is such a
• 15:20
  fantastic indicator of health, you might be tempted
• 15:22
  to look at a TSX listing as an ironclad, bulletproof
• 15:26
  vest against losing your money. But the source
• 15:28
  material warns there are some deep structural
• 15:30
  complications to this four -second rule. Yeah,
• 15:33
  the shortcut is powerful, but it is not infallible.
• 15:36
  First major reality check, a TSX listing cannot
• 15:38
  filter out human incompetence. True. Very true.
• 15:42
  The bar filters out quantitative realities. Like
• 15:44
  a lack of working capital or a lack of public
• 15:46
  float. But it fundamentally cannot filter out
• 15:48
  a terrible business model or a management team
• 15:51
  making catastrophic strategic errors. A perfect
• 15:54
  distinction. I mean, history is littered with
• 15:55
  blue chip companies that easily met all the stringent
• 15:58
  TSX requirements on a Monday and systematically
• 16:01
  collapsed into bankruptcy over the next two years.
• 16:04
  Blockbuster comes to mind, right? Exactly. The
• 16:06
  exchange verifies the math on paper. It does
• 16:08
  not promise that consumers want the product or
• 16:10
  that the CEO knows how to navigate a recession.
• 16:13
  Right. Here is a second complication that genuinely
• 16:15
  puzzled me when I was reviewing the material.
• 16:18
  We see dual listings all the time. Large Canadian
• 16:20
  companies don't just list on the TSX. They also
• 16:23
  list down in the United States, usually on the
• 16:25
  New York Stock Exchange, to tap into U .S. capital.
• 16:28
  Very common. But that means the exact same company
• 16:31
  is trading simultaneously in two different countries
• 16:33
  in two completely different currencies. How do
• 16:35
  the prices not go completely out of whack? They
• 16:38
  stay aligned through a self -correcting market
• 16:41
  mechanism called arbitrage. Right. Let me use
• 16:43
  a tangible analogy here. It's exactly like finding
• 16:46
  out a bar of gold is selling for $1 ,000 in Toronto,
• 16:49
  but buyers in New York are willing to pay $1
• 16:51
  ,100 for that exact same gold bar. Right. You
• 16:54
  would buy the cheap gold in Toronto, drive it
• 16:56
  across the border and sell it in New York all
• 16:58
  day long, locking in a completely risk free profit.
• 17:01
  And you would keep doing that until the massive
• 17:03
  buying in Toronto drove the price up and the
• 17:05
  massive selling in New York drove the price down,
• 17:08
  forcing them to match. That is precisely what
• 17:10
  sophisticated high frequency trading algorithms
• 17:12
  do millions of times a day with cross listed
• 17:15
  stocks. Algorithms, of course. Yeah. If the TSX
• 17:19
  price drifts even a fraction of a cent away from
• 17:21
  the New York price, accounting for the exchange
• 17:23
  rate. arbitrage yours instantly by the cheaper
• 17:26
  market and sell the expensive one until that
• 17:28
  gap violently slams shut. OK, that makes sense.
• 17:32
  But this brings up a thought about the exchanges
• 17:34
  themselves. We tend to view the TSX and the venture
• 17:38
  as these impartial, almost governmental referees
• 17:41
  guarding the gates of finance. But they are actually
• 17:45
  for profit businesses. They are owned by a publicly
• 17:48
  traded parent company. If their revenue literally
• 17:52
  comes from charging companies listing fees, aren't
• 17:55
  they structurally incentivized to subtly lower
• 17:58
  their standards just to win more business? Especially
• 18:01
  since they are actively competing with the lighter,
• 18:03
  cheaper CSE. You have just identified a core
• 18:06
  structural tension of the entire modern public
• 18:09
  market ecosystem. Really? Yes. The entity responsible
• 18:12
  for setting and strictly enforcing the quality
• 18:15
  standards Directly profits from getting a higher
• 18:18
  volume of companies to clear those exact same
• 18:20
  standards that feels like a massive Inherent
• 18:24
  conflict of interest. It is a profound structural
• 18:27
  tension, but it's not a conspiracy It's a standard
• 18:30
  feature of how global markets evolved and it
• 18:32
  is the exact reason why provincial securities
• 18:34
  commissions exist The regulators yes regulatory
• 18:38
  bodies sit above the for -profit exchanges They
• 18:41
  provide the necessary, impartial oversight because
• 18:44
  you simply cannot trust a revenue -driven business
• 18:46
  to entirely self -police when their quarterly
• 18:49
  earnings depend on listing volume. Regulatory
• 18:52
  oversight is the backstop. And speaking of avoiding
• 18:55
  traps, if you dabble in small cap stocks, our
• 18:58
  sources highlight a massive USOTC trap you have
• 19:02
  to avoid. Oh yes. Canadian small cap companies
• 19:05
  frequently end up with a ticker symbol quoted
• 19:07
  in the United States on the OTC or over the counter
• 19:11
  markets. And the trap is a retail investor will
• 19:14
  look up a tiny Canadian mining company, see a
• 19:17
  U .S. ticker symbol and immediately assume, wow,
• 19:19
  they went through a rigorous, prestigious U .S.
• 19:22
  listing process. They must be incredibly solid.
• 19:24
  And they did absolutely no such thing. Right.
• 19:27
  Being quoted over the counter in the United States
• 19:29
  is in no way comparable to passing the stringent
• 19:32
  globally respected listing requirements of the
• 19:34
  New York Stock Exchange or the Nasdaq. The difference
• 19:37
  in financial scrutiny, ongoing disclosure requirements,
• 19:41
  and overall regulatory rigor is night and day.
• 19:44
  So it's just convenience. Essentially. A US OTC
• 19:47
  ticker for a Canadian small cap is not a badge
• 19:50
  of corporate quality. It is merely a convenient
• 19:53
  plumbing mechanism allowing American investors
• 19:55
  to buy the stock without opening a Canadian brokerage
• 19:58
  account. So we have covered a massive amount
• 20:01
  of ground here tracing the hidden plumbing of
• 20:03
  the Canadian markets. Let's pull this all together
• 20:06
  into the ultimate cheat sheet for you, the listener.
• 20:09
  The core takeaway from today's deep dive is that
• 20:12
  checking a listing venue takes four seconds on
• 20:14
  any quote page and it acts as your first most
• 20:18
  vital filter. Exactly. The big four outline your
• 20:21
  risk. The TSX is the senior exchange, demanding
• 20:24
  substantial, audited financial proof. Check.
• 20:27
  The TSX venture is the junior incubator, explicitly
• 20:31
  built for high -risk, high -reward, early -stage
• 20:33
  capital formation. The CSE is the independent
• 20:36
  alternative, offering a lighter, cheaper path
• 20:39
  to public markets. And the fourth? The Montreal
• 20:41
  Exchange, which handles the entirely different
• 20:43
  world of risk management through derivatives.
• 20:46
  And remember that companies aren't static. Graduation
• 20:48
  is everything. The stock moving up from the venture
• 20:51
  to the TSX is unlocking massive new pools of
• 20:54
  institutional capital that were previously forbidden
• 20:57
  from playing the game. Right. But a stock moving
• 20:59
  backward, delisting into the gray market is a
• 21:02
  blaring siren of drying liquidity, widening spreads,
• 21:06
  and just utter capital destruction. But above
• 21:08
  all, remember the golden rule. The exchange is
• 21:11
  a waving flag, not a final verdict. It tells
• 21:14
  you exactly how much institutional homework has
• 21:17
  already been done on your behalf by the gatekeepers.
• 21:20
  And conversely, how much of that heavy burden
• 21:22
  now rests squarely on your own shoulders. Which
• 21:24
  brings us right back to the used car line. The
• 21:27
  exchange next to a ticker isn't just an administrative
• 21:30
  detail. It is the architectural blueprint of
• 21:33
  the risk you are assuming the moment you hit
• 21:35
  buy. And this raises an important question. Something
• 21:38
  for you to mull over the next time you are analyzing
• 21:40
  a potential high -growth investment. Oh, lay
• 21:43
  it on us. We discussed how some sound companies
• 21:46
  deliberately choose the wilder, lighter requirement
• 21:49
  CSE simply to avoid the heavy costs and deep
• 21:52
  complexities of the senior exchanges. Right,
• 21:54
  the scrappy startups. It makes total sense for
• 21:56
  a cash -strapped startup. But as an investor,
• 21:59
  you have to ask yourself, at what point is a
• 22:02
  company becoming highly successful, generating
• 22:05
  massive, sustained revenues, yet still adamantly
• 22:08
  refusing to step up and take on the transparency,
• 22:10
  the scrutiny, and the complexity of a senior
• 22:13
  exchange? At what point does that morph from
• 22:16
  a smart, cost -saving business decision into
• 22:19
  a glaring neon warning sign about what their
• 22:21
  management might be hiding? Wow. That is a phenomenal
• 22:26
  question to leave hanging in the air. Thank you
• 22:28
  so much for joining us on this Deep Dive. Keep
• 22:30
  looking closely at those quote pages and keep
• 22:33
  questioning the information that is hidden right
• 22:35
  in plain sight.