TSX Venture Exchange: How To Save It, What Every Canadian Needs To Know

Scott Hough

Read the second part of the Inquisitr‘s coverage of the TSX Venture Exchange.

An interesting story has been unfolding quietly, yet in plain view of all Canadians, with regard to the TSX Venture Exchange, the offspring of a 1999-merger involving the Vancouver Stock Exchange, described as the “scam capital” of the world by former fraud investigator Adrian du Plessis, and the Alberta Stock Exchange. There is a strong argument that the penny stocks traded on the TSX Venture are, in fact, actually options in disguise.

The timing of the demise of the Vancouver Stock Exchange, after having operated for over 90 years, as reported by Vancouver History, in 1999, with the introduction of the home internet service provider, 10 years earlier, in 1989, as reported by Indra, seems noteworthy. The “scam capital” exchange lasted about 10 years once all investors had equal access to information.

The Canadian Venture Exchange, now called the TSX Venture, exists, 17 years after its creation, with many companies on “artificial life support” and described as the “walking dead” that “should not continue to be listed,” by Business Vancouver. The TSX Venture Composite Index (JX) is down more than 40 percent since its inception in 2003 and more than 80 percent from its peak. By comparison, the NASDAQ Composite Index (^IXIC), notorious for its 75-plus percent plunge from early 2000 through 2002, followed-up with its subprime swoon in 2008, now sits near all-time highs.

This situation, seemingly a failed Canadian junior equity exchange after failed Canadian junior equity exchange, suggests an underlying problem; perhaps one that has not been properly addressed.

More than one market observer has noted a similarity between the pricing of options and the pricing of penny stocks, which is surprising, because they are quite different investments. Some of the similarities and differences between options and penny stocks are discussed by Reddit users.

“A penny stock basically IS a call option with a strike price of zero that doesn’t expire.”

The buyer of a stock option call contract has the right to buy a specified amount of stock, at a set price (the strike price), for a set amount of time. Investopedia reports that three-out-of-four option contracts expired worthless in a study conducted on both stock and commodity markets.

With this greater risk came greater potential reward, as well as a widely accepted standard that only experienced investors should be permitted to buy and sell options. Anyone with $500 cash in Canada can open a stock trading account and buy penny stocks, which trade, to a remarkable degree, just like options, on the TSX Venture Exchange. However, access to the options market is limited to those with margin accounts, for which access to derivatives markets has been explicitly requested — something that is granted only to those with a high net worth and demonstrated experience trading securities.

Modern options markets, such as the Chicago Board Options Exchange, only really began to function in the early 1970s. Prior to this, at the beginning of the 20th century when the Vancouver Stock Exchange was founded, investors certainly understood what options were, and customized contracts traded hands between individuals. However, the idea of a formal options exchange, trading standardized contracts, like we see today, if conceptualized, had not been put into effect.

Out-of-the-money call options experience a decay in value that, all other things being equal, increases at an exponential rate as the date of expiration approaches. Experienced option investors understand that when they buy an out-of-the-money option contract there is a strong chance the value is going to zero.

The similarity between the way the market values options and penny stocks is plain to see. The main point being that both usually lose most of their value, which can be seen in the chart of an Apple Inc. (NASDAQ: AAPL) June 120 call option with Big Charts, and a chart demonstrating option time decay by Discover Options.

Should the TSX Venture exchange be reclassified as an options exchange?
[Image via Discover Options]

The 10-year chart of Mountain Boy Minerals Ltd. (TSXV: MTB) shares bears a striking resemblance to that of out-of-the money call options.

Are stocks like Mountain Boy Minerals on the TSX Venture Exchange really options in disguise?
[Image via Venngage]

Investors in options understand that, if they are wrong, their investment is going to zero. It is unclear whether all penny stock investors enjoy this level of disclosure.

Given that there are hundreds, if not thousands, of companies on the TSX Venture exchange with charts that resemble charts of options, the question begs to be asked: If the TSX Venture Exchange was renamed an options exchange would investors be afforded a higher level of “full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed,” as reported by the Ontario Securities Commission guidelines for prospectus offerings, the legal gold standard with regard to the sale of securities to retail, mom and pop investors?

Are many of the no-sales, no-earnings penny stocks trading on the TSX Venture Exchange actually options in disguise?

What does all of this mean for the average Canadian?

First, unfortunately, renaming the TSX Venture Exchange to an options exchange would not create a marketplace free of pitfalls for investors. However, it would shore-up many. An elderly couple could no longer be pitched an investment in shares in a fraudulent company with a Peruvian claim; and unless the elderly couple specifically asked for access, they would not have access to options issued by such a firm.

Second, creating a marketplace with a higher level of “full, true and plain disclosure” removes a unknown, but seemingly vast, amount of motive from Canadian society for citizens to commit nefarious acts, including murder, as explained by Adrian du Plessis in the YouTube videos above. Selling fraudulent stock requires deception and in more than one instance has involved organized crime.

Is the TSX Venture really an options exchange?
“Circa 1955: An exchange official hard at work at a trading post on the floor of the Toronto Stock Exchange.” [Photo by Evans/Three Lions/Getty Image]

By insisting that companies with no revenues, no earnings, or other flaws sell only options, and not stocks, stock market regulators would be putting up a clear warning flag for the average Canadian that says, “Hey, this investment is probably going to zero,” while still allowing what seemingly few legitimate junior companies there are to have access to capital.

An examination of the Toronto Stock Exchange and TSX Venture indicates a number of smaller companies with revenues and profits trading on the junior exchange, while, perhaps puzzlingly, a number with no revenues and no profits trading on the senior exchange.

A seeming common-sense idea might be to only allow shares of companies with trailing 12 month revenues of some amount (perhaps $500,000) to trade on the Toronto Stock Exchange, and those with less to be classified as options, and listed on the TSX Venture Exchange. Currently, companies must have net assets of $7.5 million and pre-tax earnings of $200,000 to be eligible to list on the Toronto Stock Exchange. Alternatively, other variations of this formula worth consideration might include earnings minimums.

In addition to removing a seemingly huge creator of motive for nefarious acts from Canadian society, conceivably, creating this new perpetual options playing field, with a higher level of disclosure for investors, could allow a greater number of small companies to raise capital by participating in securities offerings, and an increase in trading activity.

[Photo by Evans/Three Lions/Getty Images]