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Caldwell's Urbana on hunt for profits in exchange stakes

Mining firm turned closed-end fund raises $50-million pool of capital in Toronto IPO

WINNIPEG -- There's a new way to cash in on the soaring values of securities exchanges around the world. Urbana Corp., a mining company turned closed-end fund, made its debut on the Toronto Stock Exchange yesterday for investors who want to get in on stock and option exchanges.

Urbana's IPO raised $50-million in addition to the $35-million already in its coffers. The closed-end fund will provide a pool of capital for Tom Caldwell, Urbana's president and CEO and head of Caldwell Investment Management Ltd.

Urbana already has a large position in the New York Stock Exchange and the Chicago Board Options Exchange. But that is only a taste of what can be had, for many exchanges have already been turned into public companies and others are waiting to convert from trade associations to profit-seeking businesses, Mr. Caldwell said.

Financial advisers like what Urbana is doing. "The surge in global liquidity should keep exchanges busy and profitable," said Derek Moran, president of Kelowna, B.C.-based Smarter Financial Planning Ltd. "It is absolutely a good idea to buy into the exchanges as a way of cashing in on the worldwide securities business."

The profits that can be made are stunning. Mr. Caldwell, who bought into the NYSE before its IPO in March, 2006, paid an average of $1.4-million (U.S.) for shares that have a recent price of $9.2-million. He also bought seats on the CBOE for $1.3-million. They traded yesterday at $1.9-million.

"Urbana will be able to participate in exchanges before they go public," Mr. Caldwell said. "It can take a year or two from the time that an exchange decides to go public to the IPO. We need stable capital not subject to redemptions to participate in the process of going public."

"The closed-end fund can be a very efficient way of managing money," Mr. Caldwell said. "You can trade at market price any time of the day and you don't have to worry so much about quarter-to-quarter performance. We can take a longer-term time frame."

Patience has been good to Mr. Caldwell. He amassed positions on exchanges, then waited. Relevant assets rose at a rate of 101 per cent per year for the four years ended Dec. 31, 2006. An investment of $100 (Canadian) became $1,950 in that period. Last year, the assets rose by a stunning 121 per cent, Mr. Caldwell noted.

"Going forward, we like this business," Mr. Caldwell said. "It's like a toll road. The more traffic, the greater the profit."

There is a trend to privatizing large firms, Mr. Caldwell admitted, and that can mute the growth of stock exchanges. To date, that has not had a great impact on exchanges' growth, most of which are seeing trade volumes rise at mid-double-digit rates. But the real growth component is in derivatives.

New forms of trading are competing with traditional floor exchanges, however. Electronic trading networks, often called ECNs or electronic communications networks, are taking substantial institutional business from traditional exchanges. But, Mr. Caldwell said, the overall effect on cash markets has been very small.

The biggest surge in trading is going to be in the derivatives markets that trade options and futures, Mr. Caldwell said. Urbana and other vehicles already have an investment in the Montreal Exchange, a private company. Every exchange in the world is in play. The ME trades financial futures and has a following in the U.S. and in Europe.

The future for exchanges is bright, Mr. Caldwell said. "There are monster pools of capital being created around the world. Markets will develop that reflect their national economies. For example, the Hong Kong Exchange will gain volume as more business goes public in China. Exchanges are a great way to participate in the process. As with mutual funds, it is often better to own the management company than the funds. After all, stock prices rise, listing fees and volume changes and information fees also rise."

"Urbana is one of the most efficiently run companies in the investment business. It pays no salaries, no rent, and has a 1.5-per-cent management fee," Mr. Caldwell said. "Even the outside directors have their fees capped at $5,000 per year total annual compensation." In sum, he says, "it's a great play with low fees."

It will also be a cautious play "We don't want to overpay. We won't go to Russia because we are not sure about the rule of law in that country. We do like the Kansas City Board of Trade, which is a wheat market, and we have purchased ownership participation in the Philadelphia Exchange, which is an options market. We have also entered into negotiations in Tokyo about that city's exchange." All of the deals are subject to regulatory approval, Mr. Caldwell noted.

Fund analysts like the prospects for Urbana Corp. "It builds on Tom Caldwell's past successes," said Raynor Burke, head of investment research at National Bank Financial Inc. in Toronto. "This is what Tom Caldwell has done to build his empire. He has built out a full-service shop, but becoming a impresario of stock exchanges is what he may be remembered as."

"It is a niche play, but he knows it well and he has made it his own market," Mr. Burke said. "What's more, there are signs that he is going to share the wealth with investors who can buy into the greatest source of his success."

© 2007 The Globe and Mail. All rights reserved.

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