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Canada’s Market Data Problem

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Canada's Market Data Problem

Canada’s Market Data Problem

Canada’s equities markets are just like any other market. They are made up of buyers and sellers that exchange goods – in this case, securities.

Information is what allows buyers and sellers to make decisions in the market. However, if that information is inaccurate or incomplete, it can impact the health of the market.

Information Failure

Today’s infographic from the Aequitas NEO Exchange details the current “information failure” that is happening in the Canadian market.

What’s information failure? It’s when some, or all, of the participants in an economic exchange do not have perfect knowledge. This leads to a misallocation of scarce resources and it appears to exist in numerous market exchanges.

In the case of securities in Canada, the problem arises from the market data that investors are using to make buying and selling decisions.

Canada’s Market Data Landscape

Market data is simply the information that investors see when buying or selling a security – for example, prices (bid, ask) or liquidity indicators (volume, market depth).

Aside from the TSX itself, there are 13 other trading platforms that facilitate the buying and selling of securities in Canada. These range from exchanges (like the CSE or Aequitas NEO Exchange) to more proprietary platforms (Instinet or Liquidnet) which are used primarily by institutions.

Either way, trading is being done across all these platforms each day, and each exchange generates its own market data on prices and liquidity.

The problem?

Many investors only see just part of the whole picture. For example, retail investors that buy through an online brokerage account may only see data from the TSX and TSX-V, which together account for about 59% of volume traded (as of Q4 2016).

The Consequences

By only accessing partial market data, the true liquidity or price of a security may not be accurately represented.

Here’s an example of how this unfolds in real life:

  • An investment advisor wants to buy a particular ETF for a client.
  • A partial view of the market might mean that the security looks less liquid than it actually is.
  • As a result, the advisor may choose to put the client in a different, less optimal fund.

Here’s another example:

  • An investor is considering several companies in which to invest.
  • A partial view of market activity can result in companies appearing more, or less, attractive than others.
  • Uninformed investment decisions lead to less optimal investments and the potential misallocation of capital.

In other words, information failure can affect investors and their portfolios directly – and can result in important consequences.

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Bitcoin

How Decentralized Finance Could Make Investing More Accessible

Under the current global financial system, billions of people do not have access to quality assets. Here’s how decentralized finance is changing that.

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Infographic: How Decentralized Finance Could Make Investing More Accessible

Did you know that a majority of the global population doesn’t have access to quality financial assets?

In advanced economies, we are lucky to have simple options to grow and protect our wealth. Banks are all over the place, markets are robust, and we can invest our money into assets like stocks or bonds at the drop of a hat.

In the United States, roughly 52% of people are invested in the stock market – but in a place like India, for example, this portion drops to a paltry 2%. How can we make it possible for people on the “outside” of the financial system to gain access?

Breaking Down Barriers

Today’s infographic comes to us from Abra, and it shows how decentralized finance could make investing a more universal phenomenon, especially for those that don’t have access to the modern financial system.

It lays out four key obstacles that prevent people in developing markets from investing in quality financial assets in the first place:

  1. The Geographic Lottery
    Where you live plays a massive role in determining your ability to build wealth. In advanced Western economies, the average person is much more likely to be invested in financial markets that can help compound wealth.
  2. Financial Literacy and Complexity
    Roughly 3.5 billion adults globally lack an understanding of basic financial concepts, which creates an impenetrable barrier to investing.
  3. Local Market Turmoil
    Even if a person is mentally prepared to invest, local market turmoil (hyperinflation, political crises, closed borders, etc.) can make it difficult to get access to stable assets.
  4. The Cost of Investing in Foreign Markets
    Foreign assets can be pricey. One share of Amazon is $1,800, which is realistically more money than many people around the world can afford.

In other words, there are billions of people globally that can’t take advantage of some of the most effective wealth-building tactics.

This is just one flaw in the current financial system, a paradigm that has created massive amounts of wealth but only for a specific and well-connected group of people.

Enter Decentralized Finance

Could decentralized finance be the alternative to open up access to financial markets?

By combining apps with blockchain technology – specifically through public blockchains such as Bitcoin or Ethereum – decentralized finance makes it possible to get around some of the barriers that are created by more traditional systems.

Here are some of the innovations that are making this possible:

Smart contracts could automate transactions and remove intermediaries, making investing cheaper, faster, and more accessible.

Fractional investing could allow partial or shared ownership of financial assets by using tokenization. This would make expensive stocks like Amazon ($1,800 per share) available to a much wider segment of the population.

Location independent investing is possible through smartphones. This would make it possible for people in remote parts of the developing world to invest, even without access to nearby financial institutions or local markets.

Like the internet with knowledge, decentralized finance could reshape the world by making financial access universal. Who’s ready?

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Economy

How Macro Trends Shape the Market’s Future

From climate change to aging populations, macro trends are changing the future. Here’s how to use them to your advantage.

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It’s hard to say for certain what the future holds.

Without the luxury of a crystal ball, investors must find opportunities by analyzing the market. There’s just one problem: the 24/7 news cycle is enough to make anyone’s head spin.

Where should an investor focus their attention, when almost every new venture is forecast to be the next big thing?

The Powerful Influence of Macro Trends

Today’s infographic comes to us from U.S. Global Investors, and it highlights how analyzing macro trends can serve as a key investment tool.

U.S. Global Macro Trends

Two Main Investment Approaches

When selecting stocks, many investors fall into one of two camps:

1. Top-down Investing

  1. Analyze macroeconomic trends.
  2. Identify specific sectors and regions.
  3. Choose individual stocks based on company fundamentals.

Considering the aging Chinese population, a top-down investor may choose to invest in Chinese healthcare stocks.

2. Bottom-up Investing

  1. Complete in-depth company analyses.
  2. Select a stock that is outperforming others in its sector.

A bottom-up investor could analyze Home Depot and choose to invest if it had strong performance relative to Lowe’s.

These approaches can be used separately, or even combined together. Zooming out allows investors to identify the big picture opportunities. Then, a bottom-up approach can find the companies that best capitalize on each trend.

What is a Macro Trend?

A macro trend is a long-term directional shift that affects a large population, often on a global scale. For example, climate change is affecting industries in both positive and negative ways. While “green” industries have seen increased support, ski resorts are projected to have 50% shorter winter seasons by 2050.

There are a couple of main ways to identify macro trends:

  1. Government policy
    Government policies are a precursor to change, shaping macro trends and creating opportunities. For instance, Obama’s Recovery Act fueled growth in renewable energy with a $90 billion investment.
  2. Economic cycles
    The cyclical nature of the economy means that investors can also use history to identify macro trends. Consider fiscal and monetary policy, which is implemented in response to economic data:

    • Expanding economy
      The central bank raises rates and the government reduces fiscal stimulus. As a result, inflation is moderated.
      • Contracting economy
        The central bank lowers rates and the government increases fiscal stimulus. As a result, growth is stimulated.

Discovering Long-Term Value

Macro trends are a key tool for discovering long-term market opportunities. They are beneficial because they are:

  • Unbiased and data-driven
  • Not swayed by daily headlines
  • Tend to avoid riskier, niche industries
  • Can be diversified by sectors and regions

There are currently many macro trends at play. For example, Trump’s sweeping tax reform and deregulation boosted the U.S. economy, lifting GDP growth to a 13-year high of over 3% in 2018 Q3.

However, not everyone’s a winner. America’s reduced taxes have made Canada less competitive. It’s estimated that 4.9% of Canada’s GDP is at risk due to ripple effects from U.S. tax reform. What’s more, regulators worry that the bank deregulations might put the financial system at risk.

The proposals under consideration… weaken the buffers that are core to the resilience of our system.

— Lael Brainard, Member of the Board of Governors of the Federal Reserve

So, how do investors distill this wealth of information into a future of wealth?

Spotting the Next Wave

In today’s hyper-connected world, it’s easy to get lost in data overload. Thinking big picture allows investors to focus on trends that:

  • Have a long-term outlook
  • Affect a large population
  • Create a clearer vision of the future

Then, an investor can target the most promising regions and sectors. When used effectively, this approach enables investors to ride the next big wave that will shape markets.

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