* Dividend rises to C$0.40, first hike since early 2007
* Derivatives, merger and acquisition activity in focus
* Shares rise 2 pct to C$34.24 in Toronto (Adds details, quote)
By Jennifer Kwan
TORONTO, Oct 27 (Reuters) - TMX, the operator of the Toronto Stock Exchange, on Wednesday boosted its dividend for the first time since 2007 and reported a 22 percent rise in quarterly profit as a move to diversify began to bear fruit.
Shares of TMX Group Inc (X.TO) rose 2 percent on a third-quarter performance that benefited from strong contributions from Canadian derivative and energy trading as well as other lines of business.
Those contributions, as well as lower expenses, helped offset a drop in revenue from traditional cash equities trading and a slide in the volume of securities traded on the main Toronto Stock Exchange.
The company also runs the small-cap TSX Venture Exchange and the Montreal Exchange derivatives market.
Shubha Khan, an analyst at National Bank Financial, said TMX was doing well in handling new competition from alternative trading systems such as Alpha ATS, which is backed by the dealer units of Canada’s biggest banks.
“The results were very solid and the market perception will be the same,” said Khan.
Net income rose to C$50.8 million ($49.3 million), or 68 Canadian cents a share, in the third quarter. That compares with a profit of C$41.7 million, or 56 Canadian cents, a year earlier.
Analysts, on average, had expected earnings of 64 Canadian cents a share, according to Thomson Reuters I/B/E/S.
The company raised its dividend to 40 Canadian cents a share from 38 Canadian cents. It was the first increase since early 2007, and a reflection of management’s confidence in the business outlook.
“We are executing a business plan around diversification,” Chief Executive Tom Kloet said during a conference call with analysts. “We think our future is excellent.”
Revenue rose nearly 8 percent to C$141.6 million, in line with analysts’ average forecast of C$141.7 million.
But revenue from cash markets equity trading slipped, a sore point given intensifying competition from alternative systems.
The volume of securities traded on the main Toronto exchange dropped 17 percent, while volume on the TSX Venture Exchange rose 16 percent.
Operating expenses in the quarter fell 2 percent to C$68.2 million.
TMX had about a 70 percent market share of stock trading activity in the third quarter on a volume basis, according to public data. In September, the figure climbed to nearly 75 percent in a sign that its market share has stabilized after a sharp drop in the past year, analysts said.
Kloet pointed out that the dividend increase came after a period of technology investments while the company was assimilating the Montreal Exchange and other acquisitions.
TMX aims to hone its competitive edge by offering new trading options to boost liquidity. In September, it said it plans to launch “dark order” types, allowing buyers and sellers to match trades anonymously. As well, it has aired plans to launch an alternative trading system called TMX Select, subject to regulatory approval. [ID:nN04261823]
Derivatives trading is an important focus for TMX. Kloet said it plans to introduce a clearing service for a segment of the funding market later this year or early 2011.
As well, TMX thinks it is in a good position to provide help to meet recommendations on improving over-the-counter (OTC) derivatives trading.
The global financial crisis has triggered a push to standardize derivatives trading through exchanges or cleared through a central counterparty, among other changes.
“The big growth in the securities business generally, and from the TMX, specifically, is going to be in the derivatives area,” said Brendan Caldwell, president and CEO of Caldwell Investment Management Ltd, which has holdings in TMX, as well as the Chicago Board Options Exchange CBOE.0 and NYSE Euronext NYX.N and others.
Singapore’s SGX’s bid to buy Australia’s ASX for $8.3 billion [ID:nSGE69N02J] has raised questions about the possibility of more deals in the global exchange business.
Kloet said TMX is watching consolidation developments closely, and that his company regularly assesses its strategic alternatives. “We’re open to looking at a lot of different things,” he said.
TMX Group rose 68 Canadian cents, or 2 percent, to C$34.24 on the Toronto Stock Exchange on Wednesday, despite a 1 percent drop in the market’s main S&P/TSX composite index .GSPTSE.
$1=$1.03 Canadian Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty