CAPITAL MARKETS AND THE PLAYERS
IT IS NOT FROM THE BENEVOLENCE OF THE BUTCHER, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.Adam Smith1
In Financing of Economic Activity in Canada, William C. Hood defined the capital market "as the set of contacts between buyers and sellers who effect exchanges involving non-monetary financial assets. Considering that all exchanges are effected 'in markets,' we shall say that exchanges involving non-monetary assets take place 'in the capital market'." 2
In Canada the capital and money markets are contiguous as there are no legal impediments segregating these financial markets. A key subset of the capital market are equity or "stock exchanges" where shares, representing ownership interests in companies are traded. Unlike stock exchanges where the visitor can watch transactions consummated at the various "trading posts" on the exchange's floor, capital markets are not located in one central place. Instead debt instruments, representing rights to fixed periodic payments, are traded in an "over-the-counter" or "between-dealer" market. Thus the capital market consists of a system of telephone and telex interconnections between the "bond desks" of the central bank, the chartered banks and investment dealers. Those telephone connections were used by traders to determine the availability, price and denominations of specific bonds. After making inquiries on "the street," a bond trader will then make a bid (purchase) or offering (sale) "firm." Importantly, as Adam Smith states, the behaviour of individual actors in the capital markets tend to be predictable, in the sense that they act out of necessity, and expect to make gains from their transactions.