Laura Paglia:
Hello everyone, my name is Laura Paglia. I’m president and CEO of the Investment Industry Association of Canada. The IIAC is a professional advocacy centre. Through proper research and careful consideration, we provide thought leadership that encourages smart policies for competitive and healthy Canadian financial markets. A healthy financial market should bring benefits to everyone, from the individual investor to the largest of financial institutions.

The declining listings on Canada’s public stock exchanges have been raising alarm bells for market experts. We are joined today by one of those experts, Thomas Kalafatis. Mr. Kalafatis is the managing partner and founder of Hullwright Advisors, specializing in advising platform business models, fintechs, and new venture creation on strategy, corporate finance, and policy.

He was the global head of equity execution and prime services brokerages at CIBC Capital Markets, and prior to his time at CIBC, he led the reform of the TSX’s market-making system as vice president of sales and trading. He is a chartered professional accountant with an MBA from the Ivy School of Business. We are fortunate to have Mr. Kalafatis here with us today and as an advisor to the IIAC.

Thomas Kalafatis:
Thank you, Laura, for the kind words and introduction. Just want to add something quick there to that. I started my career at Burns Fry 30 years ago in the mailroom, and I view my work here at IIAC as coming full circle in that experience. Over those years, I had the opportunity to work with many senior people who helped and advised my career. It’s really the only business I know, and I’ve worked my way up the old-fashioned way. It’s an industry that affords that opportunity, and it’s very near and dear to my heart. I want to help the industry continue to provide those opportunities for the next generation of Canadians.

Laura Paglia:
We’re very fortunate to have you as an advisor to the IIAC. As an advisor, you recently published a paper entitled “Re-energizing Canada’s Public Equity Markets,” where you explore the reasons for what is described as the hollowing out of our markets, why it matters, and how we can fix it.

In your paper, you set out that the number of companies listed on the TSX has fallen from 1,486 in 2008 to only 747 in 2023—a 50% decline in 15 years. Canadian companies are opting to sell to foreign buyers and leave the country rather than going public here. So, in a nutshell, why does that matter?

Thomas Kalafatis:
Well, Laura, one of the opportunities in having this conversation is that we can share some thoughts from the paper. It was quite long—apologies to our readers who maybe suffered through the whole document.

I’d take an even longer-term perspective. That’s why I mentioned I’ve been in the industry for 30 years. I started in the early 90s at Burns Fry, and back then, I fell in love with the business. At the time, Canada had a number of exchanges across the country—Vancouver, Calgary, Montreal, and Toronto. There were even dually competing options exchanges. It was a vibrant market. For a young person entering the field, it was fascinating.

After 30 years, when you look at the current state of the markets, you think, “How did we get here? And if we continue on this path, what does the market look like in another 30 years?” Thirty years ago, the markets provided opportunities for all Canadians. Anyone who wanted to invest in our economy directly could do so, which is a very powerful statement. If we reduce the number of publicly listed companies, we risk resembling markets overseas that have only a few hundred issuers, limiting public participation in economic growth.

Fewer listings mean fewer opportunities for people to fund companies, act as agents, raise capital, and participate in a business where hard work and brains—not just money—can create wealth. Without a vibrant equity capital market, this industry won’t be an option for our children and grandchildren. Companies also suffer without local agents or interest in funding their futures. While the vibrancy of our markets has declined, it’s not too late to turn things around with thoughtfulness, mutual interest, and energy.

Laura Paglia:
Thomas, what would you say to those who claim that the scarcity of IPOs is a global issue, not specific to Canada? Is that an acceptable explanation for the trend you’ve observed?

Thomas Kalafatis:
I recall when I was at a marketplace operator, one of the things we were most proud of was that Canada punched above its weight in global capital markets. Canada was one of the first economies to launch ETFs, index products, and other innovations. Our market share in global capital markets was higher than economies of similar size, like Italy or Australia.

No, it’s not acceptable to say Canada must suffer because the rest of the world is struggling. Yes, there’s been a global decline in IPOs, but that’s no excuse to ignore the problem. Canada has proven its ability to compete globally. With the talent, capital, and strengths we have, we can punch above our weight again. It requires competitiveness and a desire to succeed.

In any business—restaurants, transportation, or otherwise—saying, “Our volume is down because everyone’s volume is down” is not a sustainable strategy. If we’ve been competitive before, we can be competitive again.

Laura Paglia:
Thomas, you’ve mentioned the U.S., our neighbours to the south, several times. How would the proposed U.S. tariffs impact the good news story you believe could be forthcoming?

Thomas Kalafatis:
It’s an interesting point. When we wrote the paper, as you can imagine, these things take time. One challenge is that by the time you finish writing half the draft, the reality on the ground often changes.

In the paper, we discussed how Canada’s industrial, trade, and investment policies have traditionally revolved around principles of free markets, global markets, free trade, and the free flow of capital. These are bedrock principles of capitalism. However, these principles assume that counterparties will always behave in a similarly liberal manner. If they don’t, challenges arise—especially when trying to repatriate capital when it’s most needed.

There’s been plenty of discussion about tariffs, and more will surely follow. My concern isn’t solely tariff barriers to trade, which harm market efficiency, but also non-tariff trade barriers, which I find even more troubling. Over the past century, the relationship between Canada and the U.S. has built unique mechanisms that we often take for granted. These include securities industry regulations, cross-border IPO registrations, accounting frameworks, and more. We need to ensure these mechanisms continue to work positively for us.

Escalating tensions, particularly non-tariff barriers, risk undermining these mechanisms. What I’d like to see is a de-escalation of this rhetoric and a focus on maintaining the special relationship between our countries.

Laura Paglia:
You’ve referred to Canada’s large dependence on these mechanisms. Could you elaborate on non-tariff barriers to trade and what role Canada could or should play in addressing them?

Thomas Kalafatis:
I’m not sure there’s anything Canada needs to change immediately. However, we must be aware of the evolving landscape and develop alternatives to safeguard our interests. For instance, consider how capital flows between Canada and the U.S. occur. There’s a unique relationship between CDS, our clearinghouse, and DTCC in the U.S., allowing interlisted securities to trade seamlessly across the border.

Thanks to liberal direct market access rules, American participants make markets for more than 50% of the liquidity on our exchanges. This seamless flow of capital is a product of our longstanding special relationship.

Laura Paglia:
You were instrumental in opening access to U.S. markets during your time at CIBC. Has anything changed in terms of incentives and rewards for these efforts?

Thomas Kalafatis:
That’s a good question. Business decisions are always made within a strategic context at a moment in time. There’s a difference between doing things right and doing the right thing for the time. Twenty years ago, global markets were liberalizing, and the right thing to do was to open Canada to the world and bring the world to Canada. This required creating mechanisms—whether through technology, regulation, or client service—to assist international participants in accessing Canadian markets.

However, the context has changed. Many economists now write about a return to mercantilism and a statist global economy, where nations prioritize their domestic markets and participants over free trade. If this trend continues, we’ll need to rethink how to protect our markets. Canada must have a game plan to adapt to these global shifts.

Laura Paglia:
In your paper, “Re-energizing Canada’s Public Equity Markets,” you discuss the root causes of what you describe as the hollowing out of our markets. One of these root causes is the fixed costs for intermediaries and issuers, particularly the cost of labour. In the current context, what do you see happening with labour costs? Neighbourhood or neighbourhood.

Thomas Kalafatis:
That’s a great question. To be precise, it’s not necessarily the absolute cost of labour that matters—it’s the form of compensation in the industry. The core of our industry revolves around intermediation of risks, especially when it comes to creating or offering new securities, whether in primary or secondary markets. This is inherently a risky endeavour.

Investment banking and corporate finance are exceptionally challenging fields. They require substantial expertise and effort to identify and prepare companies for public markets. From surveying hundreds of companies to finding one that’s ready, conducting due diligence, marketing the company, and pricing its offering, there are numerous points of potential failure. This sequence risk makes the job incredibly demanding and compensation unpredictable.

Traditionally, this industry has been a success-based business, rewarding professionals through fees, commissions, and underwriting. High fixed compensation structures don’t align with the risk and variability inherent in the industry. Over time, though, the cost structure has shifted. The fixed costs of technology, overhead, and regulatory compliance have risen significantly. This has made it riskier for firms to undertake exploratory searches or underwrite opportunities.

Laura Paglia:
So, you’re saying that increasing fixed costs disincentivize exploration and opportunities for smaller companies?

Thomas Kalafatis:
Exactly. When fixed costs rise too high, the opportunity cost of searching for viable opportunities becomes prohibitive. This stifles the industry’s ability to bring new companies to the public market. Only the largest deals now offer sufficient rewards to sustain the search process, which reduces diversity and vibrancy in the marketplace.

Laura Paglia:
Many people think investment bankers are simply overpaid and may view their compensation as excessive. How would you respond to that?

Thomas Kalafatis:
I fundamentally disagree with that perception. And I say this not because I’m an investment banker—I’m not. My background is in secondary trading. But having spent 30 years in this business, I can tell you it’s an exceptionally difficult job.

Investment bankers require a deep understanding of business, economics, client needs, sales, and the markets. It’s a multifaceted role that demands tremendous skill and nerve. There’s also significant risk involved. Society values and rewards risk-taking, and investment banking is one of the toughest, riskiest industries out there.

Rather than focusing on jealousy over compensation, we should recognize the talent and effort required in this field. These professionals deserve their earnings because they’ve earned it through risk, perseverance, and expertise.

Laura Paglia:
In the context of what you’ve described, you mentioned regulatory overheads, and we hear a lot about the cost of regulation. Your paper recognizes the importance of regulation but also provides two real-life examples of how regulatory costs might be addressed differently. Let’s discuss them briefly. The first example is the Toronto Stock Exchange going public. Since we’re talking about their declining listings, what did we learn from that process, and how should we use those learnings?

Thomas Kalafatis:
The focus here should be on the lessons learned. I’ve had the fortune of sitting on various sides of the table—as a marketplace operator, a participant in larger capital markets firms, and someone involved in financing and the issuer side. Each perspective provides valuable insight over time.

When exchanges went public, they needed more capital to modernize and invest in their technologies. This led to regulatory trade-offs. For example, the exchanges were allowed to go public, but they couldn’t regulate themselves anymore. Historically, entities like the New York Stock Exchange in the 1930s regulated themselves, but in today’s world, the idea of self-regulation by an exchange is unacceptable.

Instead, we separated regulatory functions from exchanges. While these trade-offs made sense at the time, some decisions may warrant re-evaluation. For instance, alternative trading systems (ATS) were subsidized to ensure competition, but after 20 years, we might question whether those subsidies are still necessary.

Laura Paglia:
Another example you highlight in your paper concerns data ownership and fees. What’s the issue there?

Thomas Kalafatis:
Exchanges have monopoly rights over their data, which is passed to them by the brokerage community. While exchanges legally own the data, the costs associated with accessing it have escalated significantly. Fifteen years ago, trading fees were twice as high as data fees. Today, brokers often spend four times more on data fees than trading fees.

This is a perfect example of escalating fixed costs. As data fees rise, they reduce the incentives for creating new securities. In the short term, exchanges can boost earnings by increasing data fees, but in the long run, without new issuers, this strategy becomes self-defeating.

Laura Paglia:
Your paper proposes making the raw data from exchanges a public good. Can you elaborate on that?

Thomas Kalafatis:
The idea is that raw data—the foundational information—should be public. Exchanges could still enrich, enhance, and sell value-added data products, but the raw feed would be open access. This approach draws on precedents from other industries, such as telecommunications and transportation, where public access to foundational infrastructure spurred innovation and competition.

Making data public could attract new participants and encourage innovation around enriched products. It’s a strategy that could ultimately benefit both exchanges and the broader economy.

Laura Paglia:
Wouldn’t making raw data public cause financial harm to exchanges?

Thomas Kalafatis:
Not necessarily. Think of exchanges as operating systems. Open operating systems, like Linux, attract more interest and development. Years ago, the Toronto Stock Exchange replaced its proprietary protocol with an open one, FIX, to facilitate global participation. Opening up data similarly could reduce market noise and encourage innovation, which would ultimately benefit the exchanges.

By making raw data a public good, exchanges might find new opportunities to monetize enriched products and services while fostering a healthier market overall.

Laura Paglia:
So thank you, Thomas. You’ve been using the word public a lot—public funding, public good, public equity. What do you say to those that say private capital is providing a full and complete substitute?

Thomas Kalafatis:
Thoughts are somewhat irrelevant. The data can demonstrate that the growth of private equity has been quite phenomenal from the 80s forward. Indisputably, there’s a large going-private mechanism that’s contributed to the reduction in the number, the aggregate number, of listings on all markets globally.

But again, I would contrast that to the statement I made earlier around Canadian competitiveness and Canada’s competitiveness against other global marketplaces around the world. The private capital sphere is its own sphere. It has its benefits. It also has its cons. You don’t have the benefit of liquidity in a private capital environment.

There’s tremendous value in liquidity. There’s a reason why founders want the exit, and not just for the payday but for the liquidity. It’s very hard to borrow against private stock. You can’t—as you know, the old term is—you can’t eat private stock. You can’t borrow against it. Where a public security you can lend, you can borrow against, you can trade, you can sell, you can buy back, you can put in your RSP. There’s a lot of things you can do with a public security that you can’t do with a private security.

The goal shouldn’t be to compete or displace private capital. It’s part of a process where—you know, let’s think about how a small business evolves. I’ve been involved in startups. You start a small business, you grow, you raise some outs, you maybe self-fund it through friends and family, you raise some outside capital, it grows some more, you get to a certain scale, and then you seek to go public to offer the investors who invest in you liquidity.

Where I think the opportunity would be would be to create a new form of security or recognition of reality—really quasi-private security. And you’re starting to see platforms in the United States around crowdfunding, which is illegal here in Canada.

Laura Paglia:
Thank you, Thomas. If you could complete the sentence, “It’s a public good because…”?

Thomas Kalafatis:
We all benefit from its existence and its success. We all benefit from it because we have a lower cost of capital. Our companies have a lower cost of capital. We have access to investment opportunities. Even those who don’t participate in it—because they’ll work for a public company, or they’ll have a spouse or a family member that works for a public company, or their pension plan invests in public companies.

Laura Paglia:
Well, Thomas, thank you for joining us and thank you for writing Re-energizing Canada’s Public Equity Markets. Its honesty, depth, and suggested solutions are important to smart, beneficial policies for Canadians’ financial markets. Thank you.