Is the devil you know better than the one you don’t? That’s the question the Canadian financial services industry will have to answer as it weighs the competing bids for TMX Group Inc.
When TMX and the London Stock Exchange Group PLC announced their proposed tie-up, the move seemed to awaken a long-dormant love for the exchange within the Canadian securities sector. Firms that had long complained about everything from TMX’s fees to its fustiness were suddenly aghast that it could be partnering with a foreign rival.
This fear of the foreigner proved so powerful that the same firms that found it necessary to launch Alpha Group in order to escape the tyranny of TMX are now desperately hoping to buy it.
If this domestic bid goes ahead as planned, the result will be the restoration of TMX to its status as a near-monopoly in the trading business in Canada; as well, TMX would gain a complete monopoly over the domestic clearing business. In addition, this for-profit monolith would be controlled by a small group of large investment dealers and pension funds.
At first glance, the prospect of your biggest, toughest competition holding the keys to the venue in which you make your living should be a scary one for smaller, independent players. Competing with the banks in the current climate is hard enough. Not only do they have vast resources to spend on superior technology, marketing and personnel, they also have the clout to shape public policy to their advantage, tilting the playing field further in their favour. Allowing them to take charge of the trading environment would give them yet another significant source of leverage.
As with the proposed TMX/LSE deal, the bulwarks against corrosion in market quality will have to be governance and regulation. For the made-in-Canada solution to work for the whole industry, firms will have to rely on effective governance mechanisms and vigilant regulators to ensure that such a dominant player isn’t exploiting its market power.
Firms also will have to ask themselves whether they’d rather see the banks in control of such a crucial part of the industry or if they’d prefer to take their chances with the LSE. Which is worse, the cure or the disease?
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