By: Brien Murphy
I just finished Flash Boys by Michael Lewis, a book that takes a scalpel to the world of high-frequency trading (HFT) and its ability to rig the system. Lewis walks us through the world of traders with algorithms so fast they can front-run retail investors by milliseconds, leaving everyone else to pick up the crumbs. It’s a perfect illustration of how technology has created a market where, in some cases, the system itself is rigged. But here’s the thing—this isn’t a new phenomenon. We saw this story play out decades ago, on a much smaller but no less brutal scale, on the Vancouver Stock Exchange (VSE). And it raises the same fundamental question that still haunts markets today: How much responsibility should investors bear when it comes to price discovery? And how much responsibility should fall on regulators to protect them from systemic risks?
The question is deceptively simple, but the answers are elusive, especially when the system is rigged. The VSE, like the world of high-frequency trading, was a place where insiders had the upper hand—and the average investor got slaughtered.
The Purpose of Markets—and How the VSE Got It Wrong?
Markets are supposed to be about one thing: efficiency. They’re supposed to allocate capital to where it can generate the most value. In theory, investors put their money into opportunities, and entrepreneurs and businesses take that capital to create products, jobs, and wealth. It’s the backbone of capitalism. But in the case of the VSE, the market forgot its purpose. It went from being a vital lifeline for resource-based startups to a speculative cesspool where hustlers and crooks were the real winners.
Founded in 1907, the VSE’s original mission was to help resource-hungry junior mining companies raise the capital they needed to explore Western Canada’s vast natural resources. For a time, it worked. The capital raised by companies on the VSE fueled Canada’s mining boom. But by the late 1980s and early 1990s, things took a turn. Suddenly, you had companies with nothing but a scrap of land and a lot of hot air. They weren’t about finding new gold deposits—they were about creating speculative fantasies. And guess who was left holding the bag? The retail investor. This was the equivalent of the tech bubble but with shovels, pickaxes, and fake gold claims.
The Wild West of the VSE
In the ’80s and ’90s, the VSE wasn’t a stock exchange—it was a lawless frontier. Regulation? Barely a whisper. Transparency? A joke. It was a place where the only thing that mattered was whether you could sell a good story. (Ironically, in some ways, the markets still revolve around telling a good story.) The market wasn’t about solid companies with real prospects—it was about speculative hype and, as we now know, fraud. Investors weren’t buying stock—they were buying fairy tales.
Enter Bre-X Minerals. The perfect case study in how the VSE worked. In the 1990s, Bre-X claimed it had discovered one of the largest gold deposits in the world—buried deep in the jungles of Indonesia. The stock shot up from pennies to over $280 per share at its peak. The problem was, the gold didn’t exist. Bre-X’s geologists had fabricated the assay results, creating a phantom gold mine. When the truth came out, the stock crashed, wiping out billions in investor wealth.
This wasn’t some outlier event. It wasn’t the exception. It was the rule. The lack of oversight meant anyone could manipulate the market, creating speculative frenzies based on nothing more than a well-printed brochure and a catchy story. The insiders cashed out, and the retail investor got left with a worthless pile of paper. The pump-and-dump model wasn’t just unethical—it was the whole damn game.
Kerr-Addison: Another Scam in the Same Script
Bre-X wasn’t alone. There was Kerr-Addison Mines—a gold exploration company in Ontario in the ’80s that claimed to have discovered a massive gold deposit. Surprise, surprise, the claims were fabricated. Promoters manipulated reports, and when the stock price peaked, they dumped their shares at the top. Once again, retail investors were left holding the bag, and the fraud was exposed too late to save anyone.
This wasn’t a rogue event; it was systemic. The VSE was built on hype, manipulation, and greed. It created a market where speculation was rewarded over substance. Over time, the junior mining sector became synonymous with fraud.
The VSE’s Collapse—and the Long Road to Reform
The scandals of the ‘90s—Bre-X, Kerr-Addison, and others—were too much for regulators to ignore. In 1999, Canada merged the VSE with the Alberta Stock Exchange to form the Canadian Venture Exchange (CDNX), which later became the TSX Venture Exchange (TSX-V). The goal was to introduce more regulation and structure to protect investors and clean up the mess. But by then, the damage had been done. The VSE’s reputation was in tatters. And while reforms came, they didn’t solve the underlying issue.
Fast forward to the 2000s and the same problems still persisted. Take Sino-Forest Corporation, a Chinese forestry company listed on the TSX until its dramatic collapse in 2011. The company claimed to own vast tracts of forest in China. Investors piled in—until a short-seller exposed fraudulent accounting. Turns out, Sino-Forest didn’t own much of anything. Its assets were inflated, just like Bre-X’s gold. The result? Investors lost millions.
The same pattern played out with Gtek Resources in 2018, a speculative mining company on the TSX-V. Again, insiders hyped up exaggerated claims about the company’s holdings, manipulated the stock price, and cashed out. The result? Same as always: a spectacular crash, leaving retail investors holding the bag.
The VSE’s Legacy: Speculation, Scams, and the Real Cost
Let’s not pretend the VSE didn’t serve a purpose. It funded high-risk companies that otherwise would have struggled to raise capital. Without markets like this, many of Canada’s resource-rich areas would’ve remained untapped, and the country’s entrepreneurial spirit would’ve been stifled. But here’s the thing—markets can’t exist solely to serve the speculators. At some point, someone needs to look out for the retail investors who aren’t in on the scam.
This isn’t about a personal vendetta against junior miners or even the TSX-V. It’s about raising a question that’s been around as long as markets themselves: How much responsibility should investors bear when it comes to price discovery, and how much should regulators take to protect them from systemic risks? Price discovery is inherently a game of risk and reward, and high-reward opportunities will always attract speculators. But when the system is rigged, those risks are shifted onto the backs of retail investors.
Look at the pattern: Bre-X, Sino-Forest, Gtek. Hype. Manipulation. Insider profits. Retail investors left with nothing but regret. The lesson isn’t that speculative markets are bad—they absolutely have a place. But we need balance. Markets should allow for the possibility of big rewards, but they also need safeguards to prevent reckless speculation from turning into systemic fraud.
Reforms were a start, but they haven’t gone far enough. How do we protect investors while still fostering a market that rewards risk? That’s the real question. Because in markets driven by speculation, when things go wrong, it’s the small investor who pays the price. And that’s not how it should work.