Discount brokerages opening their doors in Canada next week
There could be major battles on Bay Street - the Canadian version of Wall Street - as stockbrokers do battle for the $400 million worth of commissions earned every year in Canada.
On April 1, stock exchanges in Toronto and Montreal are going to negotiate commissions for all trades, almost eight years after brokers did the same thing in the United States. At least three discount brokers will be ready for business on April 1, and more are thought to be making plans to open on or soon after that date.
The discount customer is said to be from the lower end of the spectrum - the investor who trades three or four times a year, a couple of thousand dollars a trade. People gearing up for the discount business contend that discount brokers will be good for the brokerage industry, because they will rid the big brokers of the small accounts that lose them money.
One large broker agreed. ''We charge a minimum of $40 a ticket, but that doesn't really cover our costs, which are about $56 a ticket.'' Some large brokerages may introduce high minimum commissions to get rid of such small unprofitable business. Discount brokers, on the other hand, will be going after that business. The secret is to give no recommendations, just take the order.
One man who is opening a discount brokerage house, Edward Pennock, feels he could pick up some business by dealing with banks. Many small investors place their orders with banks, who in turn put the order through a broker.
Mr. Pennock's firm will be called Charles Schwab Canada Inc., associated with Charles Schwab & Co., a San Francisco-based discount broker. But the deal didn't come easily. Under securities regulations in Ontario, an American firm is only allowed to own 10 percent of a brokerage dealer and Schwab's share was originally higher, Mr. Pennock says.
One Canadian firm expected to open discount operations is First Marathon Securities, a small but successful institutional specialist in Toronto.
The stock exchanges and their member brokers were not at first enthusiastic about the idea of negotiated commissions. The pressure came from regulatory bodies, such as the Ontario Securities Commission. ''There's a basic premise in our society that free-market forces should decide the cost of services,'' says Peter Dey, chairman of the Ontario Securities Commission, ''and the commission was not satisfied that an exception should be made for the brokerage industry.''
Many people in the investment business feel that discounting commissions by both big and small brokers will make the stock trading business less profitable and that in turn will mean the end to a lot of the research put out by many big ''full service'' firms. Another casualty could be the institutional boutiques, small firms that deal only with pension funds, trust companies, and other large institutions. A lot of them went under in New York after 1975.
The situation in Canada is somewhat different from the that of the US in 1975 . There is already a sliding reduction in commission rates for orders over $5, 000; on deals over half a million dollars there are already negotiated commissions; and a quick trade, bought and sold within 45 days, already carries a discount of up to 50 percent.
The large dealers feel their clients will remain loyal because of ''the full range of services we provide.'' But a survey of Canadian investors done earlier this year found that about 75 percent of them would be eager to use discount brokers, although many might want to wait a year to see how the discount brokers are doing.
There seems to be some debate as to which type of broker will be hurt by negotiated commissions. One school of thought is that small institutional boutiques will suffer; the other says large retail-oriented firms will feel the pinch. One trader for a big institution says she sees ''very little difference. It's the retail brokerage house that will be hurt.''