July 6, 2012 / 4:00 PM / 6 years ago

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

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) 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.”

The Ontario Securities Commission and Canada’s Competition Bureau approved the takeover on Wednesday, leaving only securities regulators in British Columbia and Alberta to sign off on the deal ahead of a July 31 deadline set by Maple and TMX.[ID:nL2E8I4189]

Maple spokesman Luc Bertrand said he is confident the deal will be approved before the deadline, and said it will not stop competitors from entering the market.

“The barriers to entry are very low and there are some very good operators both here in Canada, in the U.S. and in Europe,” he said. “So there is going to be continued strong competition in the exchange space.”


Eleven exchanges and alternative stock trading venues operate in Canada now, after changes that whittled away the near-monopoly 98-percent stranglehold that the TMX Group held just three years ago.

That roster includes several TMX-owned exchanges such as the TSX Venture Exchange, as well as the tiny TMX Select alternative trading system. Other venues include Chi-X Canada, run by Chi-X Global, which is owned in part by Instinet, an agency broker, and privately held stock exchange CNSX.

The TMX exchanges still dominate the market with a share of about 65 percent. Three-year-old Alpha, owned by some of the same financial institutions that set up Maple, has clawed out a market share of around 19 percent with competitive prices and products, as well as more user-friendly trading technology.

Maple has not yet said what it will do with Alpha.

In approving the deal this week, the Ontario Securities Commission laid down rules to ensure fair pricing and trading behaviors, but analysts say it remains to be seen how effective they will be.

Key concerns have always been fair pricing and access to trading and clearing services given the potential for conflict of interest resulting from that fact that Maple’s owners are dominant traders in the market.

Maple is made up of 12 players including four of Canada’s biggest banks, an insurer, as well as securities firms and two big Canadian pension funds.

“From a competitive point of view you have a situation where you almost have a monopoly,” said Torstein Braaten, chief executive of Match Now, a dark pool trading venue that has about a 3 percent share of total stock trading in Canada.

“History has shown that it’s difficult to compete even in the current environment.”


Still, some say competitors could get a small boost in market share as dealers shop around for a better deal.

“People like some degree of choice in Canada,” said Robert Young, head of Liquidnet Canada. “It’s natural. People tend to parse out their business around a little bit.”

If Canada follows the pattern seen in the United States, the sector could see further ebbs and flows in the number of alternative markets, said Justin Schack, head of market structure analysis at institutional agency brokerage Rosenblatt Securities in New York.

But even if no new market players show up in Canada, the natural forces of competition will keep TMX-Maple on its toes, given the fact that companies can - and do - list their stocks in both Canada and the United States.

“In the exchange space now no one has a lock on volumes,” said Thomas Caldwell, chairman of Caldwell Financial and a TMX shareholder.

“You can go to the CNSX, the Nasdaq, you can go to a dark pool, other alternative trading systems. Exchanges aren’t the same monopoly vehicles they were 40 years ago. So if an exchange gets abusive in the pricing, you just trade somewhere else.”

($1=$1.02 Canadian)

Reporting By Jennifer Kwan; Editing by Janet Guttsman; and Peter Galloway

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