Tsx group inc., the parent company of the Toronto Stock Exchange and the TSX Venture Ex-change, is facing key competitive challenges, both internationally and domestically. Its response to these challenges will determine whether it will continue to prosper and retain its role as Canada’s predominant exchange firm.
Its challenges are significant. TSX Group has to secure and protect its place in the context of the North American and global exchange industry, determine the best strategy for developing or acquiring a derivatives business and protect its position as Canada’s premier equity exchange in the face of new domestic rivals, which hope to steal market share.
But Richard Nesbitt, who has been the firm’s CEO since December 2004, has a strategy in place: TSX Group will focus on its core strengths. As such, Nesbitt is positioning TSX Group to be the world’s foremost mining and energy exchange, a key player in the North American market and Canada’s undisputed national exchange firm.
In addition, the company intends to enter the derivatives market, one way or another. It is blocked by an agreement with Montreal Exchange Inc. from doing so until March 2009.
And Nesbitt is confident TSX Group can hold its own against small start-up rivals seeking to muscle into the TSX’s backyard. Two such start-ups say they will launch this year.
“We’re competing every day against the New York Stock Ex-change and Nasdaq,” says Nesbitt, adding the TSX can match the two main U.S. exchanges in price, technology and low fees. “If we can compete successfully against the Americans, that would lead me to feel pretty good about our ability to compete against domestic competitors.”
The global exchange industry is in a state of upheaval. Technological innovations, the liberalization of global capital flow and changes in regulation meant to encourage competition are forcing exchanges to rethink the way they do business.
Stock markets that were for centuries non-profit entities owned by the brokerage firms that traded on them have gone public and subsequently shot up in value. Electronic trading has replaced the physical trading floor almost everywhere, and the world’s biggest exchanges are linking up — in December, New York-based NYSE Group Inc. bought Paris-based Euronext NV for US$14.6 billion — creating international behemoths.
New and unexpected threats and rivals are emerging, as well. In Europe, seven of the biggest investment banks in the world plan to launch their own exchange, cutting out the established markets altogether. In many jurisdictions, small, lean, technologically nimble exchanges — alternative trading systems — are also stealing business from the primary bourses.
Nesbitt has been marketing the TSX to U.S. and foreign companies as the natural home for the world’s resources firms — some 60% of the world’s public mining firms trade on the TSX — and for small and medium-sized firms that want access to North American capital. Observers believe that strategy is a good one.
“The TSX competes with New York by saying that Toronto has the top analysts for the resources sector. So, this is where you need to list if you are in this industry,” says Stephen Sapp, a professor of finance at the Ivey School of Business at the University of Western Ontario. “This is why such a large percentage of the TSX is in this sector, which is very small portion [of the market] in New York. This has helped the TSX survive.”
Certainly, TSX Group is thriving. In the nine months ended Sept. 30, 2006, the firm enjoyed a 22.5% increase in revenue to $261.8 million and a 27.6% spike in earnings to $96.4 million compared to the same period the previous year.
However, the TSX is facing competition from other global exchanges, most notably London Stock Exchange PLC’s Alternative Investment Market. With access to European capital markets, a unique regulatory regime and aggressive marketing, the AIM is finding traction among many up-and-coming junior companies, including some Canadian ones.
Nesbitt acknowledges that the AIM has its advantages, but is confident in those of the TSX. “We are a very effective alternative to the AIM, particularly for companies that want North American time-zone liquidity,” says Nesbitt, who estimates that 40% of the TSX’s trading flow comes from the U.S.
Although the TSX is undeniably marketing itself as a North American exchange with a specialization in resources, industry experts say the fact that it is a national exchange operating in a protected regulatory environment might be what really ensures the TSX’s future.
@page_break@“Until regulatory environments are harmonized and mutually respected, there will always be a place for a Canadian exchange,” says Lawrence Harris, former chief economist with the U.S. Securities and Exchange Commission and chair of finance at the University of Southern California.
But if the TSX were to cease being a true national exchange, he adds, it might suffer the same fate as most regional bourses in the U.S., which have either declined in relevancy or disappeared.
So, is there a possibility that TSX Group would get caught up in the current global merger trend? Nesbitt does not rule it out. “If you had asked a year ago, ‘Do you think that the Paris bourse would be acquired by the NYSE?’ you probably would have thought that wasn’t going to happen,” he says. “Why would Canada be any less likely to participate than, say, Paris? So, is it possible? Anything’s possible, but don’t take that as saying something’s imminent, because it isn’t.”
Any such move would need to stickhandle its way around its structure. Although there are no limits to foreign ownership — foreign investors hold 35% of TSX shares — no single investor can hold more than 10% of TSX shares without the approval of the Ontario Securities Commission.
At home, TSX Group and the ME, the country’s dominant derivatives market, appear to be keeping a watchful eye on each other as the 2009 non-compete deadline approaches. TSX Group has made no secret of its desire to combine derivatives with its equities business. But the ME has so far proved determined not to fall into Toronto’s arms. In December, the ME announced that it would be going public, leading to speculation it might be setting itself up for a bidding war among potential suitors.
So, is the TSX planning to start its own derivatives exchange in 2009? Nesbitt declines to give a definitive answer. “Right now, we’re doing the analysis of ‘Should we buy? Should we build? Should we joint venture with somebody else?’” says Nesbitt, adding that the TSX will reveal its plans early this year.
In addition, the TSX must contend with two new exchanges that are launching this year: Pure Trading, a subsidiary of Toronto-based Canadian Trading and Quotation System Inc. , which itself has been operating as a junior equities market since 2003; and Instinet Canada Cross, a subsidiary of U.S.-based Instinet Inc. , which has been successful in running low-cost, high-speed exchanges in the U.S. and Asia. Instinet is launching another in Europe, as well.
Unlike in the U.S. and other countries in which alternative exchanges have managed to hive off significant business from the primary exchange, Canada has not yet seen a strong rival to the TSX. Part of the reason for that is the TSX was quick off the mark, relative to some other global exchanges, to transform into a modern, fully electronic, publicly traded firm.
But Canada’s capital market is lagging other countries’ markets in offering global institutional traders — particularly those using algorithmic trading systems — the speed, efficiency and low fees they expect, says Ian Bandeen, vice chairman and CEO of CNQ and Pure Trading.
“We took the view that an exchange is really a commoditized utility,” he says. “If you’re going to win against an entrenched monopoly, you had better offer something that is markedly better, faster and cheaper. And it can’t be a little; it has to be by a factor.”
Pure Trading, which will not have listings but will instead facilitate trading of TSX-listed equities, will be able to offer speed, low cost and efficiency, Bandeen adds. The new exchange had originally set a launch date of Jan. 19, but announced in early January that it would delay its launch until March in response to requests from investment dealers for more testing of the trading and order-management systems.
Bandeen believes that once Pure Trading is up and running, it will attract “huge pockets of order flow” that had not bothered with the Canadian capital market because of its lack of speed and multiple exchanges, which algorithmic trading requires. That new business will benefit all Canadian exchanges, including the TSX, he says.
Instinet has been short on details since announcing this past December that it would launch the ICX, which, like Pure Trading, will trade TSX-listed stocks. The firm is awaiting regulatory approval, but says it is “on track” to launch this year. It, too, has promised to provide faster and cheaper trades for institutional traders. In the U.S., Instinet executes more than 30 million shares a day of cross-trading, on average.
“The ATSes will definitely be able to find a niche, as long as they’re able to deliver on their promises,” Sapp says.
Meanwhile, TSX Group has moved to protect itself against new rivals, spending heavily on updating its technology. This year, it plans to launch its own ATS called the ATX, a high-speed trading engine that allows brokers to cross “buy” and “sell” orders, which will compete directly with the new entrants. In October, TSX Group acquired Shorcan Brokers Ltd., a fixed-income interdealer broker, and Scotia Capital Inc. ’s fixed-income indices in Canada.
Nesbitt says he meets with client brokers every day and is aware of their issues: “We do understand our customers are under fee pressure. We do everything we can to pass on our efficiencies. As we become more efficient and as we’re able to cut our fees, we will do that.”
Nesbitt feels the TSX is well positioned to meet the challenges it faces, both globally and locally. “We’re feeling very good, although we’re not complacent,” he says. IE
TSX
meets challenges head on
- By: Rudy Mezzetta
- January 22, 2007 January 22, 2007
- 10:33