THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 334

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PA R T I I I

Financial Institutions
Before 1999, the Canadian capital markets landscape consisted of the Toronto
Stock Exchange and small regional exchanges in Vancouver, Calgary, and
Montreal. In 1999, however, the Calgary and Vancouver exchanges consolidated
to form the Canadian Dealing Network Exchange (CDNX), which dealt with
emerging companies and the venture capital market. The Montr al Exchange (ME)
was left to provide for the derivatives market, and the Toronto Stock Exchange was
the singular market left for senior stocks.
The Toronto Stock Exchange has undergone many significant changes in the
last decade. It ditched the original initials TSE in favour of TSX, mainly in order to
eliminate confusion with the Tokyo Stock Exchange. On May 1, 2001 the TSX
bought the CDNX, forming the new joint venture called the TMX Group of
Companies. The TMX Group of Companies encompasses the Toronto Stock
Exchange, the TSX Venture Exchange, and its own regulatory arm, TSX Market
Regulation Services.
Organized stock exchanges actually function as a hybrid of an auction market
(in which buyers and sellers trade with each other in a central location) and a
dealer market (in which dealers make the market by buying and selling securities
at given prices). Securities are traded on the floor of the exchange with the help
of a special kind of dealer-broker called a specialist. A specialist matches buy and
sell orders submitted at the same price and so performs a brokerage function.
However, if buy and sell orders do not match up, the specialist buys stocks or sells
from a personal inventory of securities, in this manner performing a dealer function. By assuming both functions, the specialist maintains orderly trading of the
securities for which he or she is responsible.
Organized exchanges are also heavily regulated. In particular, government
regulatory bodies, such as the Ontario Securities Commission, impose regulations that govern the behaviour of brokers and dealers involved with exchanges.
Furthermore, recent advances in computers and telecommunications, which

reduce the costs of linking these markets, have encouraged the expansion of a
national market system. We thus see that legislation and modern computing
technology are leading the way to a more-competitive securities industry.
Another development is the growing importance of the Internet in securities
markets.
The growing internationalization of capital markets has encouraged another
trend in securities trading. Increasingly, Canadian companies are being listed on
U.S. stock exchanges, and the markets are moving toward trading stocks internationally, 24 hours a day.

MU TUA L FU N DS
Mutual funds are financial intermediaries that pool the resources of many small
investors by selling them shares and using the proceeds to buy securities. Through
the asset transformation process of issuing shares in small denominations and buying large blocks of securities, mutual funds can take advantage of volume discounts on brokerage commissions and purchase diversified holdings (portfolios)
of securities. Mutual funds allow the small investor to obtain the benefits of lower
transaction costs in purchasing securities and to take advantage of the reduction
of risk by diversifying the portfolio of securities held. Many mutual funds are run
by brokerage firms, but others are run by banks or independent investment advisers such as Fidelity or Investors Group.
Mutual funds have seen a large increase in their market share since 1980, due
primarily to the booming stock market during the 1990s. Another source of growth