* EPS C$0.63 vs year-earlier C$0.65
* Revenue up 6 pct at C$137.6 million
* TMX stock closes down 4.7 percent at C$33.55 (Recasts, adds CEO quotes from conference call, details)
By Jennifer Kwan
TORONTO, July 29 (Reuters) - Quarterly profit sagged at Toronto Stock Exchange operator TMX Group Inc (X.TO) as expenses rose and cash equity trading revenue was weaker than the market expected, sending its shares down 4.7 percent.
The company, which also operates the small-cap TSX Venture Exchange and the Montreal Exchange derivatives market, said on Wednesday that net income fell to C$46.9 million ($43 million), or 63 Canadian cents a share, in the second quarter.
That was largely in line with analyst estimates of 62 Canadian cents, before items.
In the year-ago quarter TMX earned C$49.2 million, or 65 Canadian cents a share.
TMX shares closed down 4.7 percent at C$33.55 mainly on disappointment that cash equity trading revenues were "weaker than what the market was expecting," said John Aiken, analyst at Dundee Securities.
That weakness reflects fee cuts as TMX responds to competition from alternative trading venues, he added.
"They need to defend their turf on the trading but in the current environment, when you have much lower levels of listings coming through, the fee-cutting on the trading really gets exaggerated," added Aiken, noting however it's not a longer term concern.
Another area of focus is the impact of a greater rebates paid to so-called high frequency traders, or electronic liquidity providers, as they play a greater role in overall market activity. Currently, they account for about 15 to 20 percent of trading volume, said TMX executives.
"We are spending a great deal of development effort in going down to the U.S. and introducing our marketplace to that type of account," Thomas Kloet, chief executive of TMX Group, told a conference call with analysts.
TMX implemented a new fee model in January that included changes to lure these types of players, which has effectively resulted in lowering TMX's average revenue per trade, analysts said.
Asked whether the company intends to alter its fee model going forward, Kloet said: "We will continue to look at our pricing."
Cash equity trading revenue on the TSX fell 19 percent to C$19.5 million despite a 32 percent increase in trading volume, while on the Venture Exchange revenue slid 30 percent to C$6.4 million as volume shrank 20 percent.
"The two issues from last quarter -- the fact that high frequency traders would lower their revenue and looking for good cost cutting -- neither of those concerns were alleviated this quarter," said Richard McCormick, an analyst at Blackmont Capital Inc.
TMX has aggressively cut fees, improved technology and diversified its business to fend off competitors eager to take market share.
It has bolstered its derivatives, energy trading and market data units as the equity trading space gets cramped.
But TMX is not "married to a market share game," Kloet said.
"I want to make it clear that the focus here is on the bigger picture," he said. "Our strategy is to attract new market participants and additional volumes."
At the second quarter, TMX market share, on a volume basis, fell to 89 percent from 97 percent in the fourth quarter. Competitors Alpha ATS was at 6.3 percent, while Chi-X had 2.4 percent and Pure Trading made up 1.4 percent, according to the Investment Industry Regulatory Organization of Canada, a self-regulatory body.
TMX revenue rose 6 percent to C$137.6 million in the latest quarter, boosted by its energy trading, fixed income and market data units. Analysts had expected revenue of C$138.2 million.
Operating expenses rose 24 percent to C$67.6 million, reflecting expenses related to its derivatives markets and technology initiatives, the company said. New equity financing rose to C$13.8 billion from C$9.5 billion.
$1=$1.09 Canadian Reporting by Jennifer Kwan; editing by Rob Wilson