New TMX Group gets down to business

TMX has completed the first two phases of its integration strategy — consisting of submitting its plans and obtaining regulatory approval. Now, the company is looking ahead to the execution phase, which will see the Alpha name kept alive through the retention of its “dark pool” offering — Intraspread — as well as Alpha’s central limit-order book, a fully automated, transparent order book for trading board lots in a continuous manner.

However, when it comes to Alpha’s listing business, TMX has decided to shut it down.

“I think of the Alpha platform as more of product than as a company [fitting] into TMX Group,” says Tom Kloet, president and CEO of TMX. “We didn’t think the listing efforts that [Alpha] was offering were providing any new functionality or value-added to the marketplace. We feel that with our current offerings of TSX and TSX Venture Exchange that we cover the spectrum of potential issuers quite well. And those brands are superior to the Alpha brand.”

Over the next year, Alpha’s offering will migrate to TMX’s Quantum technology, and Alpha’s data centres will be combined with TMX’s data centre, a move that will provide customers with further reductions in complexity and costs.

But the integration plans also will see the loss of 100 jobs over the next year as Alpha and CDS are integrated into TMX and overlapping roles are rationalized.

Despite TMX’s huge share of Canada’s trading activity, Shubba Khan, vice president and equities research analyst with National Bank Financial Ltd. in Toronto, says that market share isn’t static and that there is room for competitors to increase their trading volume.

“I think there will be incremental market share gains by other [automated trading systems (ATSes)] in the near future,” Khan says. “There will certainly be some attrition; but it definitely won’t be like how it was back in 2008 and 2009, when Alpha was a strong competitor.”

Although the full effects of the TMX/Alpha merger won’t be felt until next year, smaller competitors in the exchange business are already planning ways to expand their pieces of the trading pie.

Toronto-based Chi-X Canada ATS Ltd., which has an 8.35% share of TSX-listed securities trading volume year-to-date, has seen its Canadian market share steadily increasing month-over-month — and company executives hope the new TMX won’t change that.

“With the recent market structure changes, we have an opportunity to expand our market share even further,” says Dan Kessous, CEO of Chi-X Canada. “Over the past year, we have gained significant market share. Last week [mid-November], we captured 14.7% of TSX-listed securities by volume, up from 8.7% in November 2011. With our new platform, we are looking to attract a new segment of trading participants through unique pricing and products.”

Chi-X Canada recently announced plans to launch a second Canadian trading facility, CX2 Canada ATS, that will focus on the “lit pool” market (equities markets that offer pretrade price displays called “lit” models, in contrast to dark pools).

“Canada’s equity landscape will soon change dramatically,” Kessous says. “With CX2, we hope to satisfy the trading community’s demand for healthy competition and help ensure Canada remains at the forefront of innovation, both domestically and globally.”

CX2 is set to open in the first quarter of 2013. Kessous hopes to attract customers that Chi-X Canada is not currently targeting with its existing platform.

“With the securities regulator introducing a new rule that focuses on dark pools,” Kessous says, “the market has been pushed to have more of the trading and flow to the lit market. What we are trying to do is attract trading from firms that have been affected by fee changes and higher fees on typical marketplaces.”

Brian Crew, president and CEO of Toronto-based Omega ATS Ltd., is also confident that his company will continue to gain market share despite changes in the securities-trading sector.

Currently, Omega holds 1.1% of the volume of trades in the Canadian marketplace so far this year. Omega operates as an auction market, based on strict price and time priority, as opposed to some of its competitors’ broker-preferencing models.

“There seems to be quite a bit of buzz within the regulatory community,” Crew says, “over whether or not broker preferencing should still exist in 2013. So, [broker preferencing] is one of those things that we have considered implementing but just aren’t 100% on yet.”

Omega also is in the process of launching an additional ATS, and is in discussions with the Ontario Securities Commission regarding that service. Crew hopes the second platform will be up and running within the first six months of 2013, but has yet to decide what it’s going to look like.

“We have always been innovators in the marketplace,” says Sean Debotte, director of business development for Omega. “And we believe that once we get a good clear picture of what the landscape looks like over the next couple months, we will be able to devise exactly where our pricing and order-matching technology should land in order to build a niche that is still open.”

But not everyone believes building another trading platform is healthy for the exchange sector. Richard Carleton, CEO of Pure Trading Inc. in Toronto, says that launching an additional platform is only going to add to the complexity and frustration in the sector.

“I don’t see any constituency from the dealer community in Canada for more fragmentation in the provision of execution services,” Carleton says. “Increasing the number of books [and] adding to the complexity of the order types is only going to challenge the dealer community in meeting their objectives in providing the best execution for their clients and controlling the cost in doing business.”

Instead, Carleton says, Pure Trading plans to remain competitive by aiming to reduce complexity as well as reduce the costs of trading Canadian stocks.

With the marketplace already highly competitive, all executives in the trading sector agree that even though Canada is an attractive marketplace to enter, trading volumes over the past 18 months will certainly deter any outside competition from crossing the border anytime soon.

“I think the decrease in trading volumes across the board has taken a lot of bloom out of that rose,” Carleton says. “The idea of coming up and looking at execution services alone is obviously a much tougher business case than it was a couple years ago.” IE