* EPS 65 Canadian cents vs 45 Canadian cents
* TMX Group shares close down 2.3 percent at C$31.36 (Adds details, CEO and analyst quotes)
By Jennifer Kwan
TORONTO, Jan 28 (Reuters) - Canadian stock exchange operator TMX Group Inc X.TO reported a 61 percent jump in its quarterly profit on Wednesday as derivative industry acquisitions added to revenues and market volatility boosted trading volumes.
TMX Group, which runs the Toronto Stock Exchange and the small-cap TSX Venture Exchange, said net income in the fourth quarter was C$49 million ($40.5 million), or 65 Canadian cents a share, in the three months ended Dec. 31.
That compares with a profit of C$30.4 million, or 45 Canadian cents a share, in the year-earlier period.
The company said earnings were hit by a non-cash adjustment of 12 Canadian cents a share as it marked interest rate swaps to market prices.
Analysts, on average, had expected earnings per share of 67 Canadian cents, before items, on revenue of C$142.79 million, according to Reuters Estimates.
Revenue rose 36 percent to C$151.4 million from C$111.2 million, helped by the inclusion of revenue from its operations of the Montreal Exchange, acquired last May, and the Boston Options Exchange.
TMX acquired a controlling stake in BOX in August.
Increased issuer services, cash equity and energy trading and market data revenue also boosted revenues, TMX said.
“It shows they continue to generate very strong financial results even in a tough market,” said Jeff Fenwick, an analyst at Cormark Securities. “The challenge looking forward will be can they continue to grow.”
The rise in revenue was offset by operating expenses, which climbed 40 percent to C$65.9 million, TMX said.
Fenwick added TMX continues to diversify its business as more trading venues have arrived in Canada, most recently, bank-backed Alpha Trading Systems, which launched last fall.
But the impact of new alternative trading systems has yet to be felt, market watchers say.
Indeed, the fight for market share has squeezed out BlockBook, a so-called “dark pool” launched in 2005. It is expected to shut on Feb. 19, according to a notice last week by self-regulatory body Investment Industry Regulatory Organization of Canada.
But even as new competitors such as Alpha emerge, TMX continues to dominate with about a 98 percent market share, and is expected to remain highly profitable and capable of strong long-term revenue and earnings growth, said Fenwick.
In the quarter, overall equity trading volumes on the TSX rose nearly 34 percent to 33.04 billion from 24.73 billion in the year-ago period.
However, the small-cap Venture Exchange saw volumes drop to 10.74 billion from 15.14 billion.
“The fourth quarter is likely going to be a near-term high in earnings because of headwinds the TMX Group faces in terms of declining activity,” said John Aiken, an analyst at Dundee Capital Markets.
Going into 2009, trading activity and listings are expected to decline, while market data revenues may also drop as the economic environment forces the financial services sector to cut back, said Aiken.
“TMX Group has been affected by the economy, particularly in our listings business,” Tom Kloet, chief executive of TMX, told a conference call.
“We hope that the recent lack of listing activity will be short-lived and we will continue to meet the challenges presented by current market and economic conditions.”
TMX plans to enhance its product and services offering to compete for increased market share in cash, derivative and energy markets, he added.
Shares of TMX closed down 2.3 percent, or 74 Canadian cents, at C$31.36 on the Toronto Stock Exchange. ($1=$1.21 Canadian) (Reporting by Jennifer Kwan; editing by Rob Wilson)