Despite turbulent financial markets, TMX Group Inc. will plunge full speed ahead with its plans to “integrate-enhance-innovate” its cash and derivatives markets, as well as launch its new trading technology in 2009.

Currently, TMX Group generates $381.8 million in revenue, with 11% of its revenue generated from its Montreal-based derivatives market. The company hopes to merge the derivatives market with its Toronto Stock Exchange cash market, which generates about 18% of its revenue.

“This would result in cost synergies of about $25,” said Michael Ptasznick, CFO, in his overview of financials at the TMX Analyst Day on Friday in Toronto. The integration would reduce 85 positions, consolidate five to three offices in Montreal, and reduce one office in Toronto.

Other opportunities for increasing TMX profitability rest in expanding its share in the global derivatives market, with 88% of derivatives worldwide traded over the counter. “We see opportunity to bring over the counter products traded around the world on to the exchange,” said Tom Kloet, TMX CEO. “Ultimately, we are at the mercy of the markets.”

In his overview of where Canada stands in the financial storm, Kloet said, “We aren’t out of the woods yet. The falling value of commodities paired with volatile credit and currency markets has slowed Canada’s economy.

“The silver lining,” though, in a glum forecast, said Kloet, is the opportunity to create a centralized clearing house for the derivatives market. “The goal is to bring risk management to the trading of over the counter products,” said Kloet, by using the services of the Canadian Derivatives Clearing Corp. Employing the CDCC will give dealers more transparency in their investments and improve the speed and efficiency at which the securities trade.

“I’m very bullish about the derivatives market. It hasn’t reached its potential,” said Luc Bertrand, TMX Group Deputy CEO, and president and CEO of the Montreal Exchange. Stunting the growth are brokers with licenses to deal in OTC derivatives that aren’t trading as much as they could be, according to Bertrand. To improve the securities among brokers, the TMX has been very aggressive in providing brokers with education seminars he added. “Retail investors are going to demand more sophistication or a higher level proficiency when it comes to brokers,” said Bertrand.

With the popularity of algorithmic trading skyrocketing, Brenda Hoffman, senior vp and chief investment officer of TMX Group, announced the group would be rolling out the second phase of its gateway, TSX Quantum, in June 2008. Transaction time out side will be cut in half to a third, she said. “For the equity part of the business, gateway technology is the last piece in the chain,” said Hoffman, in order to be competitive with markets around the world in the algo market. “As important as speed is to sports, it’s even more important to business,” added Eric Sinclair, senior vice president of TSX Datalinx.

According to TMX research, algo-trading has risen on the exchange by 50% in the last year to 46 million transactions for the third in 2008 from 30.7 million transactions during the same period last year.

“It’s a positive revolution,” said Rob Fotheringham, senior vice president of trading. “More algo trading means more liquidity…tighter bid ask spreads for dealers.”

Currently a third of the trades executed in the United States and Europe are algorithmic trades and the TMX expects this figure to rise to 50% by 2010. To ensure algo-traders get the best price on TMX exchanges, the group will also install a new smart order router to be launched in the fourth quarter of 2008. The router will scan all Alternative Trading Systems in Canada for a best offer and re-direct an order to a competing exchange, if the offer is not on the Toronto Stock Exchange.

Beyond technology, the TSX will focus on three key strategic initiatives next year: international growth, clean tech marketplace and product service expansion. “We want to be the gateway to North America for listings” said Richard Nadeau, senior vp of the Toronto Stock Exchange. “We also see opportunities to bring both derivatives and cash products to the climate exchange for some of our clean tech issues.”

IE