The Canadian Trading and Quotation System Inc. - CNQ

The Canadian Trading and Quotation System Inc. (CNQ) was launched on July 25, 2003, as an alternative to the existing Canadian stock exchanges. CNQ is a private company that was founded by veterans of the Canadian capital market including a former senior investment banker with BMO and a former official of the Toronto Stock Exchange (TSX) with 20 years of experience. Management has stated that the exchange was founded on the principles of liquidity, integrity and transparency. The CNQ targets emerging small-cap companies who do not want to pay high fees and/or endure the long wait periods required to get transactions approved by other stock exchanges. On May 7, 2004, the Ontario Securities Commission granted stock exchange status to the CNQ.

CNQ market data can now be accessed through TSX Datalinx, an arm of the TSX that provides stock information from various providers. In addition, online quote providers such as www.stockwatch.com now provide information on CNQ listed companies. All CNQ public filings are available on www.sedar.com or www.cnq.ca. Complete market depth is also available on the CNQ website. Share price increments are $0.005 for stocks trading below $0.50 per share and increments increase to $0.01 for equities trading above $0.50.

Investors can trade the securities listed on the CNQ through many major investment dealers including BMO, Canaccord, Global Securities, Haywood Securities, Leede Financial, Northern Securities, Scotia, TD, Union Securities and Wolverton Securities.

The CNQ utilizes a Market Maker system of trading in which a CNQ investment dealer can become authorized (upon its own request) to maintain market liquidity for a certain security through entering bids and offers to sustain a continuous two-sided market. Once market maker status is granted, the investment dealer is then required to maintain a continuous two-sided quotation in the designated security for at least 3 consecutive months. The CNQ may also appoint market makers if an investment dealer’s recent trading activity in a stock justifies market maker status. Designated market makers must accept and provide best execution of orders made by other brokerages. Market makers are entitled to a transaction fee for each trade they conduct. It should be noted that more than one market maker can exist for each company and not all CNQ securities have market makers. Any investment dealer may enter orders or conduct share crosses for stocks without market makers.

The CNQ attempts to put investor interest as the top priority in its unique system of market making which levels the playing field through absolute time and price priority. When client orders are received, market makers must immediately enter the orders into the electronic trading system. Investment dealers can’t put up crosses with institutional clients without first satisfying smaller clients who already have orders in place. This rule contrasts the policies implemented by the TSX.

A one-time initial listing fee of $10,000 is required for listing on the CNQ accompanied by a flat monthly sustaining fee of $300 ($3,600 per annum). Both of these costs are significantly lower than those charged by the TSX and TSX Venture Exchange. In addition, no fees are charged by the CNQ for transactions such as financings or stock option grants.

Like the other Canadian exchanges, the CNQ sets minimum standards for companies applying for a listing. These include minimum working capital and shareholder distribution requirements. Issuers must also provide prospectus-level disclosure in their listing statement and update the information annually. In addition, insiders are subject to the same background checks as required by the TSX. These checks are conducted by Market Regulation Services, a company co-owned by the TSX and the Investment Dealers Association.

Once listed, CNQ issuers are subject to rules governing share issuances designed to address shareholder dilution. All but the most trivial non-arm's length transactions must be disclosed to CNQ and investors. CNQ-listed companies are subject to the same continuous and timely disclosure rules as issuers on the other exchanges, and additional CNQ periodic reporting rules to ensure that shareholders stay informed of the company's progress. Trading is subject to the same Universal Market Integrity Rules, which are developed and monitored by Regulation Services.

When companies want to proceed with a business transaction, all relevant information must be disclosed online, without interference from the exchange. Once details of a proposed transaction are posted, the issuer can close the deal in as little as 24 hours. For integrity and accountability purposes, CNQ requires a certificate from a senior officer of the company representing that the company is in full compliance with both CNQ rules and applicable securities legislation.

Management believes that its model of enhanced disclosure, coupled with greater accountability, does more to encourage compliance in issuers than the traditional transaction-review approach implemented by other exchanges. The rules utilized by the CNQ can also benefit investors because listed companies are able to devote more time and financial resources to building shareholder value.

One of the obvious drawbacks to the CNQ is the lack of liquidity in many listed companies. With about 50 companies currently trading on the exchange, the CNQ doesn’t get the same level of exposure or investor interest enjoyed by competing Canadian exchanges. In addition, many investors are wary of the lack of CNQ’s involvement in the business transactions carried out by listed companies. However, astute investors may find it easier to find “undervalued” companies due to the lower level of interest generated among active investors, institutional firms and brokers.