Analysis: TMX deal makes life tough in Canada's markets

Fri Jul 6, 2012 11:57am EDT
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By Jennifer Kwan and Euan Rocha

TORONTO (Reuters) - Canada's small stock trading venues will find the struggle to grow even tougher once a made-in-Canada takeover of the operator of the Toronto Stock Exchange gets the final regulatory green light, creating a giant that will dominate the market.

The C$3.8 billion ($3.7 billion) takeover of TMX Group (X.TO: Quote) by the bank-led Maple Group consortium will merge the Toronto exchange with its biggest rival, Alpha, and with the Canadian Depository for Securities, which clears and settles all stock trades in Canada.

And even with conditions from regulators designed to prevent the new entity from squeezing out competition from other exchanges and alternative trading systems (ATS), it will create a one-stop shop for stock trading, clearing and settlement, leaving smaller players facing a hard slog.

"There's nothing in this that is going to benefit the competition ... It's going to make it a struggle," Doug Clark, managing director of research at agency broker Investment Technology Group, said of the rules governing the new TMX-Maple entity.

"The TMX is like the hardware store that has fully stocked shelves. Some of the smaller ATSs are like the low-rent hardware store that has half-stocked shelves, and half the stuff is not in good repair."

The outcome of the deal is being closely watched by the trading community, which sees healthy competition as a way to ensure better prices and handling of trades.

"On the positive side it might spur some more innovation by small players. On the other side, because the combined Alpha-TSX will be larger, maybe more liquidity will flow there," said Chris Sparrow, a trading consultant.

"It's a little unclear on what that balance will be."   Continued...